The Effect of Arthur Andersen's Demise on Clients' Audit Fees and Auditor Conservatism: International Evidence

37 Pages Posted: 26 Oct 2012

See all articles by Bin Srinidhi

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Mahmud Hossain

King Fahd University of Petroleum & Minerals - Department of Accounting and MIS

Chee Yeow Lim

Singapore Management University - School of Accountancy

Date Written: Autumn 2012

Abstract

Using samples from 12 non‐U.S.A. countries, we find that following Arthur Andersen's failure in the United States of America, successor Big‐N auditors charged an audit fee premium for ex‐Andersen clients compared to existing clients and non‐Andersen switch‐ins. We show that this audit fee premium is not attributable to the Andersen switch‐ins having lower prior earnings quality or lower bargaining power than non‐Andersen switch‐ins. We also show that ex‐Andersen clients exhibit higher earnings quality after the switch than do ongoing clients and other switch‐ins. These results suggest that the audit fee premium is attributable to auditor conservatism. Furthermore, we find that risk assessments for ex‐Andersen clients are higher in countries with weak legal and extra‐legal institutions. We interpret this result as suggesting that the effect of lost auditor reputation is stronger when objective evidence of earnings quality is uncertain because of weaker supporting institutions. This is the first study to document a direct effect of countrywide institutions on audit risk assessment.

Suggested Citation

Srinidhi, Bin and Hossain, Mahmud and Lim, Chee Yeow, The Effect of Arthur Andersen's Demise on Clients' Audit Fees and Auditor Conservatism: International Evidence (Autumn 2012). Journal of International Financial Management & Accounting, Vol. 23, Issue 3, pp. 208-244, 2012, Available at SSRN: https://ssrn.com/abstract=2167152 or http://dx.doi.org/10.1111/jifm.12001

Bin Srinidhi (Contact Author)

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Mahmud Hossain

King Fahd University of Petroleum & Minerals - Department of Accounting and MIS ( email )

Department of Accounting and MIS
College of Industrial Management. KFUPM Box 5076
Dhahran, 31261
Saudi Arabia
+966 13 860 8496 (Phone)
+966 13 860 3489 (Fax)

HOME PAGE: http://www4.kfupm.edu.sa/cim/acct_mis.html

Chee Yeow Lim

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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