Big Four Auditor Failures and the Reputation Hypothesis

Bunney L Schmidt, Utah Valley State College
John T Sennetti, Nova Southeastern University
Steven D Johnson, Utah Valley State College
Farid Islam, Utah Valley State College

ABSTRACT. Prior research shows the affect of the Enron audit failure on Andersen’s other clients. We investigate the more general question as to whether a specific, well known audit failure for each of the remaining Big Four audit firms did similarly affect their other audit clients in the post-Enron environment. We seek to determine whether client stock price declines occur within the three day window surrounding the determined date of the announced audit failure.

We consider four audit failures: Adelphia, HeathSouth, Xerox and Tyco, one each for the Big Four accounting firms. We study abnormal returns for the stock prices of the remaining non-failure clients from 9,593 stocks available on Compustat 2000 and Center for Research in Security Prices (CRSP) databases. Consistent with the Andersen study, we find corresponding client stock price declines for each audit failure for each of the Big Four. Well-known audit failures may impact other firm clients.

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