In the wake of the collapse of Enron and Andersen, several questions were raised about Enron's accounting and the behavior of its auditor. An important question is whether ex‐Andersen's clients received more conservative treatment by their new auditors, either due to a greater perceived litigation risk because of their previous association with Andersen or because of a “correction” of alleged lax auditing by Andersen. We examine going‐concern modified audit opinions for former clients of Arthur Andersen, and compare them with opinions issued for other newly acquired clients. We find that auditors were less likely to issue going‐concern modified audit opinions to small clients who switched from Andersen than to their existing clients. However, this trend reverses with an increase in client size, with large former Andersen clients more likely to receive going‐concern opinions. Our results are consistent with suggestions that increased litigation risk associated with the larger ex‐Andersen clients led to increased conservatism by the new auditors. We conjecture that the reduced conservatism for the smaller ex‐Andersen clients is likely due to high ex ante conservatism of the Big 4 in not accepting clients perceived to be risky.
Were Former Andersen Clients Treated More Leniently Than Other Clients? Evidence from Going‐Concern Modified Audit Opinions
Jagan Krishnan, K. Raghunandan, Joon S. Yang; Were Former Andersen Clients Treated More Leniently Than Other Clients? Evidence from Going‐Concern Modified Audit Opinions. Accounting Horizons 1 December 2007; 21 (4): 423–435. https://doi.org/10.2308/acch.2007.21.4.423
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