Meeting 13 4

Srac

bTMce

Pa

Wm

Accounting Horizons American Accounting AssociationVol. 24, No. 4 DOI: 10.2308/acch.2010.24.4.6712010pp. 671–688

Audit Report Lags after Voluntary andInvoluntary Auditor Changes

Paul Tanyi, K. Raghunandan, and Abhijit Barua

SYNOPSIS: We find that the audit report lag is significantly higher for former Andersenclients �that did not follow their Andersen partner to the new audit firm� than for clientsvoluntarily changing auditors from another Big 5 predecessor for the fiscal year endedDecember 31, 2002 �the first year with the new auditor for ex-Andersen clients�. Thedifferences in audit reporting lags between the two groups are not significant for fiscalyears ended December 31, 2000 �the last year before Andersen’s Enron related prob-lems surfaced�, or 2003 �the second year with the successor auditor�. We also find thatclients with voluntary �i.e., non-Andersen� auditor changes have only marginally higheraudit reporting lags compared to clients without auditor changes. Our results, focusingon a cost component of involuntary auditor changes, thus provide relevant empiricalevidence for debates surrounding mandatory auditor rotation. We also find that ex-Andersen clients that followed the Andersen partner to the new audit firm had shorteraudit report lags than ex-Andersen clients that did not follow their Andersen partner.Our findings highlight the importance of individual relationships in the auditing process,and suggest new avenues for future research.

INTRODUCTIONection 207 of the Sarbanes-Oxley Act �SOX, U.S. House of Representatives 2002� requiresthe Comptroller General of the United States to “conduct a study and review of the potentialeffects of requiring the mandatory rotation of registered public accounting firms.” This

equirement was spurred by concerns that the “independence of a public accounting firm … isdversely affected by a firm’s long-term relationship with the client and the desire to retain thelient” �GAO 2003�.

Some recent studies have sought to derive implications about the effect of mandatory rotationy investigating the association between auditor tenure and various measures of audit quality.hese studies examine measures such as earnings management by clients �Johnson et al. 2002;yers et al. 2003�, forecast errors �Ghosh and Moon 2005�, and the likelihood of issuing going-

oncern modified audit opinions �Geiger and Raghunandan 2002; Choi and Doogar 2005�. Gen-rally, these studies have concluded that contrary to the concerns expressed by legislators and

aul Tanyi is a Ph.D. student, K. Raghunandan is a Professor, and Abhijit Barua is an Assistant Professor,ll at Florida International University.

e thank two anonymous reviewers and Karla Johnstone �associate editor� for their many useful and constructive com-ents on earlier versions of this paper.

Submitted: July 2009Accepted: March 2010

Published Online: December 2010Corresponding author: K. Raghunandan

Email: [email protected]

rer

vTtnc2

acaocec

facoA

eapaa

fcaacc

fa�fr“

1

672 Tanyi, Raghunandan, and Barua

AA

egulators auditor tenure has a positive association with audit quality and that the empiricalvidence does not support calls for mandatory rotation. The auditor tenure studies note that theiresults may be relevant to the debate about mandatory auditor rotation.

The studies cited above have examined instances where auditor tenure has been impacted byoluntary decisions of the client �to dismiss the auditor� or the auditor �to resign from a client�.he controversy about auditor tenures, fueled by legislators’ and regulators’ comments and ac-

ions, relates to mandatory auditor turnover. While relevant, the findings of auditor tenure studiesoted above do not directly provide evidence about the consequences of involuntary auditorhanges because of the endogenous nature of the decision in voluntary auditor changes �Nagy005; Krishnan et al. 2007�.

The auditor changes that occurred following the collapse of Arthur Andersen in 2002 provideunique situation of involuntary auditor changes. The indictment of the firm in March 2002

reated considerable uncertainty about the ability of Andersen to survive, which led to forceduditor changes for the vast majority of Andersen’s clients. The forced auditor changes thatccurred after the demise of Arthur Andersen reflect some elements of the mandatory auditorhanges advocated by legislators and regulators. This unique setting enables researchers to providempirical evidence about auditor decisions and audit quality in the context of involuntary auditorhanges.

Some prior studies have examined if successor auditors treated former Andersen clients dif-erently than other clients by focusing on accruals quality and audit opinions �Nagy 2005; Cahannd Zhang 2006; Krishnan et al. 2007�. These studies compare former Andersen clients with otherontinuing clients of other Big 4 firms. The latter group typically includes only a small proportionf clients that had a voluntary auditor change in the same period as the forced change fromndersen.

In this paper we compare the effects of mandatory versus voluntary auditor changes byxamining audit report lags—that is, the time lag between the fiscal year-end and the date of theudit report. We focus on audit report lag �admittedly an imperfect proxy� because it is the onlyublicly observable quantitative proxy for the extent of auditors’ work.1 Audit report lag, and thessociated financial reporting lag, has recently been an issue of significant concern to regulatorsnd the auditing profession �SEC 2002b, 2002c�.

We recognize that clients changing auditors—voluntarily or involuntarily—are quite differentrom other �continuing� clients. Hence, we compare the audit report lags for former Andersenlients and other clients voluntarily changing auditors during 2002. We argue that mandatoryuditor changes would lead to higher reporting lags than voluntary auditor changes; hence, theudit reporting lag would be greater for ex-Andersen clients than other clients that voluntarilyhanged auditors, in the initial year with the successor auditor. Our tests thus examine a costomponent of mandatory auditor changes.

Some recent studies have sought to differentiate between former Andersen clients by classi-ying such firms into “followers” �i.e., those that followed their former Andersen partner to a newudit firm� and “non-followers.” Blouin et al. �2007� find that discretionary accruals are greaterthat is, higher levels of earnings management are present� for companies that followed theirormer Andersen partner; further, non-followers were likely to have greater agency and switchingelated costs. Kohlbeck et al. �2008� and Vermeer et al. �2008� find that audit fees are lower forfollower” former Andersen clients than for non-follower former Andersen clients in the first year

Audit fees also are publicly observable after February 5, 2001, but audit fees represent a product of both quantity �auditwork� and price �dollars per unit of work�.

ccounting Horizons December 2010merican Accounting Association

wfia

tlsvAact

tp

Tp

eccAfi

5pcfa

amcewtt

dwktaa

Audit Report Lags after Voluntary and Involuntary Auditor Changes 673

A

ith the new auditor. In the non-profit sector, Vermeer �2008� finds that switching costs, thenancial condition of a non-profit, and the size of the market are associated with the likelihood ofnon-profit audit client being a “follower.”

Following prior research, we argue that “follower” former clients of Andersen would bereated differently than the “non-follower” former Andersen clients. Further, we argue that “fol-ower” switches by ex-Andersen clients represent auditor changes in form, but perhaps not inubstance. This suggests that for a proper examination of the differences arising from voluntaryersus involuntary auditor changes the comparisons should be between “non-follower” ex-ndersen clients and non-Andersen clients that switched auditors during the same period. In

ddition, we also examine the “partner change effect” by comparing the two types of ex-Andersenlients: we argue that the audit reporting lag will be smaller for “follower” ex-Andersen clientshan for “non-follower” ex-Andersen clients.

The latter tests, examining differences between ex-Andersen clients that did or did not followheir Andersen partner to the new audit firm, are also relevant in the context of the mandatory auditartner change rules of SOX. Section 203 of SOX states that:

It shall be unlawful for a registered public accounting firm to provide audit services to an issuer ifthe lead �or coordinating� audit partner �having primary responsibility for the audit�, or the auditpartner responsible for reviewing the audit, has performed audit services for that issuer in each ofthe 5 previous fiscal years of that issuer.

hus, we also provide empirical evidence about the costs associated with the mandatory auditartner rotation rules of SOX.

We test our hypotheses by comparing the audit report lags for the following three groups:x-Andersen clients that followed their partner to the new audit firm �“followers”�, ex-Andersenlients that did not follow their Andersen partner to the new audit firm �“non-followers”�, andlients that switched auditors during 2002 from a Big 5 predecessor other than Andersen �“non-ndersen switchers”�. Given the rapid demise of Andersen, we limit our analysis to firms withscal year ends of December 31, 2002.

We find that non-follower ex-Andersen clients had longer audit report lags �62.57 days versus6.08 days� than clients of other Big 5 auditors who switched to a new auditor in 2002. Thisrovides empirical evidence related to the differences between mandatory and voluntary auditorhanges. Further, we find also that audit report lags are, on average, 4.56 days �7.8 percent� loweror “follower” clients than for “non-follower” clients. This finding quantifies some of the benefitsssociated with partner familiarity, or the costs associated with mandatory audit partner changes.

Finally, we compare clients without an auditor change against the three types of clients withn auditor change discussed above. We find that clients with voluntary auditor changes have onlyarginally higher audit reporting lags �p � 0.10� compared to clients without auditor changes; in

ontrast, both types of clients with mandatory auditor changes �ex-Andersen “followers” andx-Andersen “non-followers”� have significantly higher �p � 0.01� audit report lag than clientsithout auditor changes. Overall, our results provide evidence that voluntary auditor changes lead

o modest increases in audit report lags, and that mandatory auditor changes significantly increasehe audit report lag when compared with voluntary auditor changes.

We recognize that the post-Andersen auditor changes are different from those under a man-atory auditor rotation regime. First, under mandatory rotation, everyone knows ahead of timehen a change is scheduled. Second, incoming auditors following mandated changes also wouldnow that their tenure is limited to a maximum period specified by the rotation regime rules. Yet,he failure of Andersen represents a unique situation that captures some elements of a mandatoryuditor rotation regime in that the clients were involuntarily required to go with a new auditor atspecified time.

ccounting Horizons December 2010American Accounting Association

iaSwcicrs

ad

M

co

Etdi

fa

tias

atbfi

coianty


AA

Our paper adds to the auditing literature along several different streams. First, given thenterest of legislators and the public in mandatory auditor rotation, we provide empirical evidencebout differences in audit report lags arising from voluntary and involuntary auditor changes.econd, audit report lags have been of recent interest to the SEC, auditors, and public companies;e provide empirical evidence about audit report lags following three different types of auditor

hanges: voluntary auditor changes �by clients of other Big 5 firms�; involuntary auditor changesn form, but perhaps not in substance �“follower” ex-Andersen clients�; and involuntary auditorhanges in form and substance �“non-follower” ex-Andersen clients�. Third, our paper adds toesearch about the personal nature of auditing relationships—namely, clients’ associations withpecific audit partners and the production efficiencies arising from such relationships.

The next section discusses the background and develops the hypotheses. This is followed bydiscussion of data and method. The results follow, and the paper ends with a summary and

iscussion.

BACKGROUND AND HYPOTHESESandatory Rotation of Auditors

More than a quarter century before SOX, the Metcalf Committee report had expressed similaroncerns about the effects of long tenure on auditor judgments. The Staff Report of the Committeen Government Affairs �U.S. Senate 1976, 21� noted:

Long association between a corporation and an accounting firm may lead to such close identifica-tion of the accounting firm with the interests of its client’s management that truly independentaction by the accounting firm becomes difficult. One alternative is mandatory change of accoun-tants after a given period of years.

ven earlier, nearly 50 years ago, Mautz and Sharaf �1961� suggested that long associations withhe same client can lead to problems with independence. Though Mautz and Sharaf �1961, 208�id not call for mandatory auditor rotation, they noted that “the greatest threat to his �the auditor’s�ndependence is a slow, gradual, almost casual erosion of his ‘honest disinterestedness.’”

Periodically, the SEC continued to express its concerns about the possible adverse effectsrom long auditor tenures �SEC 1994; Turner and Godwin 1999�. However, the SEC did not takeny regulatory action related to mandatory auditor rotation.

Proponents of auditor rotation suggest that long-term relationships between the auditor andhe client could undermine perceptions of auditor independence �U.S. Senate 2002�. Since thencentives associated with keeping a particular client are smaller, and since there would be anotherudit firm reviewing the work within a specified period of time, auditors “might be less likely touccumb to management pressure” �GAO 2003�.

The opposition to mandatory auditor rotation is based on the fact that effective audits requirethorough understanding of the client’s business and processes; such understanding develops over

ime and there is a steep learning curve that lasts a year or more. Hence, audit quality is likely toe lower in the initial years of an audit �GAO 2003�. Along these lines, Loebbecke et al. �1989�nd that irregularities are more likely in the initial years of an audit engagement.

A related point is that the disruption to the client caused by rotation leads to nontrivialommitment of resources �personnel and financial� in educating the auditor about the client’sperational and accounting matters. In addition, Geiger and Raghunandan �2002� note anncentive-related argument: incumbent auditors earn quasi-rents due to the start-up costs associ-ted with audits and lowballing �the pricing of initial-year audits below economic cost� arises as aatural phenomenon. Hence, auditors would be interested in recouping their initial-year losses inhe future; consequently, the threats to auditor independence may in fact be higher in the initialears of an audit engagement.


Sofiprr

R

saqdfiasgCb

mattAt

A

sct2yi

iraoial

2


A

Legislators considered imposing mandatory auditor changes during the hearings that precededOX; many former SEC chairs supported such a rule �U.S. Senate 2002�. Nevertheless, in the facef opposition from auditors and others, the final rules adopted a compromise. With respect to auditrm rotation, Section 207 of SOX required the GAO to “conduct a study and review of theotential effects of requiring the mandatory rotation of registered public accounting firms” andeport back to Congress within one year of enactment of the law. However, Section 203 of SOXequired mandatory rotation of the audit partner every five years.

elated ResearchSome recent studies have examined the association between auditor tenure and various mea-

ures of audit quality. Johnson et al. �2002� and Myers et al. �2003� use clients’ abnormal accrualss a measure of audit quality and document a positive association between tenure and audituality. Davis et al. �2009� find that firms with both short and long tenure are more likely to useiscretionary accruals to meet or beat earnings forecasts, suggesting that audit quality is lower inrms with short or long tenures. Ghosh and Moon �2005� show a positive association betweenuditor tenure and investors’ perceptions of earnings quality �as measured by the earnings re-ponse coefficient�. Geiger and Raghunandan �2002� find, for a sample of bankrupt firms, thatoing-concern modified audit opinions are positively associated with auditor tenure. However,hoi and Doogar �2005� use a general sample of stressed firms and find that there is no associationetween auditor tenure and the likelihood of a going-concern opinion.

The auditor tenure variable in all of the above studies is impacted by voluntary decisionsade by the clients �to dismiss the auditor� or the auditor �to resign�. Voluntary auditor changes

re quite different from involuntary auditor changes, such as those arising from mandatory auditorurnover �Nagy 2005; Krishnan et al. 2007�. It is this difference that makes the auditor changeshat occurred in the aftermath of Andersen’s failure unique. The forced auditor change for ex-ndersen clients provides a unique opportunity to empirically examine issues related to involun-

ary auditor changes.

udit Report Lag, Auditor Changes, and Andersen’s DemiseAudit report lag, and the associated financial reporting lag, has recently been an issue of

ignificant concern to regulators and the auditing profession �SEC 2002b, 2002c�.2 As part of thehanges made to financial reporting subsequent to SOX, the SEC reduced the 10-K filing lag �i.e.,he number of days from the fiscal year-end to the filing of the 10-K with the SEC� starting in003 �SEC 2002c�. Krishnan and Yang �2009� find that audit report lags have increased in recentears, both prior to the introduction of new rules shortening the 10-K filing lag and also after thentroduction of the new rules.

Any auditor change creates disruption; both the client and the auditor incur substantial switch-ng costs. In the aftermath of an auditor switch the client “spends a significant amount ofesources—both financial and human—educating the new auditor about company operations andccounting matters” �GAO 2003�. The new auditor has to learn about the business practices,perations, and financial reporting systems of the client, and incur substantial extra effort becom-ng familiar with the client in the year following an auditor change �Flanigan 2002�. Hence, theudit risk is also higher in an initial-year engagement; in turn, this suggests that the auditor wouldikely perform more work in an initial-audit engagement.

For example, the SEC �2002b� sought to shorten the filing due dates for annual and quarterly reports filed with thecommission “as a step in modernizing the periodic reporting system and improving the usefulness of quarterly andannual reports to investors.” Following concerns expressed by auditors and others, the SEC �2002c� modified theproposals but noted that technological advances have made it easier for registrants to “capture, process, and dissemi-nate” financial information.


poreaho

EbsdcTo1

stan

pb�tbentaaA

H

crrh

3

4


AA

A former chief accountant of the SEC noted in congressional testimony that “on average, yourovide about a third additional hours in the first year” �Turner 2002�. To the extent at least a partf such additional work is done at the end of the fiscal year �as opposed to interim work�, the auditeporting lag should be higher following auditor changes. This argument also suggests that ifx-Andersen clients are to be compared with other clients on audit-related issues in general, orudit reporting lag in particular, then the appropriate comparison group should be clients that alsoad �voluntarily� an auditor change around the same time as the �involuntary� auditor changes thatccurred due to Andersen’s demise.

On October 16, 2001, Enron announced major restatements; events unfolded rapidly, withnron declaring bankruptcy on December 2, 2001. Almost immediately, legislators and the mediaegan asking questions about the role of Andersen in Enron’s failure. Andersen admitted tohredding Enron-related documents on January 10, 2002, and was indicted for such documentestruction on March 14, 2002; the SEC �2002a� issued a special release in which it requiredompanies to obtain extra assurances from Andersen for audit reports signed after March 14, 2002.he special release made references to clients who may wish to leave Andersen and to the need forrderly transitions to new auditors. Andersen was found guilty of criminal wrong doing on June5, 2002, and the firm responded by formally announcing it would cease to practice.3

Thus, Andersen clients had to involuntarily switch auditors and do so quite quickly. Suchwitches were made somewhat easier by the fact that many Andersen offices were purchased byhe other large audit firms �see Kohlbeck et al. �2008� for a more detailed description of thecquisition process�. Many former Andersen clients followed their former Andersen partner to theew audit firm, thereby easing the transition.

Blouin et al. �2007�, Kohlbeck et al. �2008�, Vermeer �2008�, and Vermeer et al. �2008� useublicly available data about the purchase of former Andersen offices to document differencesetween ex-Andersen clients who �likely� followed their former partner to the successor auditor“follower”� and those who did not follow their former Andersen partner �“non-followers”�.4 Inhe context of our study, it is likely that the typical extra work associated with a new client woulde much less for a “follower” client than for a “non-follower” client. This is because the priorxperience with a “follower” client means that for such clients the audit team will not have toavigate the steep learning curve typically experienced in initial-audit engagements. That is, forhe “follower” ex-Andersen clients the auditor change after Andersen’s demise can be viewed asn auditor change in form, but not in substance. This in turn means that the extra audit effortssociated with new audit clients should be either nonexistent or lower if the client followed thendersen partner than if the client switched to a different firm with a new audit partner and team.

ypothesesIn this study, we examine if the audit reporting lag differs for clients with mandatory auditor

hanges when compared clients with voluntary auditor changes. We do this by comparing the auditeporting lags for ex-Andersen clients that did not follow their Andersen partner against auditeporting lags for other clients that changed auditors during the same period. This leads to the firstypothesis �in the null form�:

H1: There would be no differences in audit reporting lag, in the first fiscal year with the newauditor, between “non-follower” ex-Andersen clients and non-Andersen clients changingauditors.

On May 31, 2005, the U.S. Supreme Court reversed Andersen’s conviction.We use the qualifier “likely” because publicly available data about the purchase of Andersen offices are only at the firmlevel; it is possible that a former Andersen partner decided not to go to the new firm. However, such actions byindividual partners would introduce a bias against finding differences between follower and non-follower ex-Andersenclients.


baT

pt

s5fierw

w

5


A

The “follower” Andersen clients can be viewed as simply having an auditor change in form,ut not in substance. Therefore, we expect that “follower” ex-Andersen clients would have a lowerudit reporting lag in the first year with a new audit firm than “non-follower” ex-Andersen clients.his leads to the following hypotheses �in the null form�:

H2: Audit reporting lag in the first fiscal year with the new audit firm would not be higher for“non-follower” ex-Andersen clients than for “follower” ex-Andersen clients.

Thus, H1 examines the effect of mandatory, as opposed to voluntary, auditor changes. Hy-othesis 2 examines the “partner familiarity effect” and thus provides evidence related to manda-ory audit partner rotation.

METHOD AND DATAWe compare the audit reporting lags for fiscal year 2002, which is the first year with the

uccessor auditor following Andersen’s demise. Further, since Andersen was a member of the Big, in our tests we restrict the control group to those clients that had another �non-Andersen� Big 5rm as the predecessor auditor and had an auditor change in 2002. We use the same model toxplain audit report lags as Krishnan and Yang �2009� and add one specific variable to theegression model depending on the research question of interest.5 Thus, to test the first hypothesise use the following regression model:

SQLAG = �0 + �1AA + �2EXTRAORD + �3SEGMENTS + �4FOREIGN + �5HIGROWTH

+ �6HILITIG + �7HITECH + �8FINCOND + �9LOSS + �10GC + �11LNTA + error

�1�

here:SQLAG � square root of the number of days between fiscal year-end and the date of

the audit report;AA � 1 if the firm is an ex-Andersen client, 0 otherwise;

EXTRAORD � 1 if the firm has extraordinary items on its financial statement, 0 otherwise;SEGMENTS � square root of the number of business segments;

FOREIGN � 1 if the firm has foreign operations, 0 otherwise;HIGROWTH � 1 if the firm belongs to high-growth industries �two-digit SIC codes 35, 45,

48, 49, 52, 57, 73, 78, and 80�, 0 otherwise;HILITIG � 1 if the firm belongs to litigious industries �two-digit SIC codes 28, 35, 36,

38, and 73�, 0 otherwise;HITECH � 1 if the firm belongs to high-tech industries �three-digit SIC codes 283,

284, 357, 366, 367, 371, 382, 384, and 737�, 0 otherwise;FINCOND � probability of bankruptcy, estimated from Zmijewski’s �1984� model for

nonfinancial firms �calculated as of the end of the fiscal year�;LOSS � 1 if the firm reports a loss before extraordinary items, 0 otherwise;

GC � 1 if the firm receives a going-concern opinion, 0 otherwise; andLNTA � natural log of total assets �measured as of the end of the fiscal year�.

Krishnan and Yang �2009� have three additional variables: FIN �finance industry client�, BIG4 �whether auditor is a Big4 auditor�, and BUSYYREND �whether fiscal year-end is in December or January�. We do not have these three variablesin our model because our sample includes only nonfinancial firms having a Big 4 auditor and with a December 31 fiscalyear end.


cmFFcphsqi

fa

AsgFa

D

ifcap�ynhys

pi“pA

iarcfic


AA

Since we are using the same model as Krishnan and Yang �2009�, our discussion of theontrol variables is relatively brief. Briefly, audit report lag is expected to be higher for firms withore complex operations, so we include EXTRAORD, SEGMENTS, and FOREIGN in the model.inancial problems and going-concern uncertainties add to the auditor’s work, so we expect thatINCOND, LOSS, and GC will have positive coefficients. High growth is typically with morehanges, leading to more new things to audit so we expect the coefficient of HIGROWTH to beositive. We also control for the fact that the auditor’s business risk varies across industries, andence include HILITIG and HITECH. We include our final control variable, LNTA, for two rea-ons. First, larger clients can exercise greater influence on their auditor to complete the audituicker �e.g., Ashton et al. 1989�. Second, almost all prior accounting and auditing researchncludes client size as a control factor.

The “treatment” sample for testing H1 includes ex-Andersen clients that did not follow theirormer Andersen partner to the new audit firm. The control sample includes clients that changeduditors from another �other than Andersen� Big 5 auditor during 2002.

Our second hypothesis compares audit reporting lags for follower and non-follower ex-ndersen clients. We use the same model as for hypothesis one but with two changes. First, the

ample now includes all �and only� ex-Andersen clients. Second, since we are only comparing tworoups of ex-Andersen clients, we replace the AA variable in the model with a variable calledOLLOW that takes a value of 1 when the client follows the former Andersen partner to a newudit firm, and is 0 otherwise.

ataThe Andersen sample consists of all nonfinancial firms that had a December 31 fiscal year-end

n 2002, and have data available about �1� audit report lag, audit firm name, and audit opinion typeor fiscal year 2002 available in the Audit Analytics database; and �2� relevant financial and otherontrol variables in the Compustat database. The control sample consists of all firms that �1� hadDecember 31 fiscal year-end for 2002; �2� had an auditor change during 2002 from a Big 5

redecessor other than Andersen; and �3� meet the same data requirements as the Andersen samplei.e., data available in Audit Analytics and Compustat databases�. We use a December 31 fiscalear-end restriction because of the relatively rapid nature of Andersen’s collapse; hence, it wouldot be appropriate to compare a client with a December 31, 2002 fiscal year-end with a client thatad a fiscal year ending June 30, 2002. We examine also the change in audit report lags from fiscalear 2000; hence, to simplify the analysis and presentation we require that the data be available forample firms for both fiscal years 2000 and 2002.

Our analyses partition the ex-Andersen clients based on whether they followed their Andersenartner to a new audit firm. Kohlbeck et al. �2008� and Vermeer et al. �2008� provide detailednstructions �based on data provided by PAR �2002�� about classifying ex-Andersen clients asfollowers” or “non-followers” �both studies use data provided by PAR �2002��. We use the datarovided in Kohlbeck et al. �2008� and Vermeer et al. �2008� to classify our sample of ex-ndersen clients as “followers” or “non-followers.”

RESULTSPanel A of Table 1 presents descriptive statistics about two groups of firms changing auditors

n 2002: 198 ex-Andersen clients that did not follow their Andersen partner to the new audit firmnd 120 clients that switched from another Big 5 auditor �other than Andersen�. The average auditeport lag for ex-Andersen clients is 6.49 days higher than for clients of other Big 5 auditorshanging auditors during 2002 �62.57 versus 56.08�; ex-Andersen clients are less likely to be innancial distress, and are significantly larger than the control sample of other companies thathanged auditors.


lients

P

V

p-values from t(median) [Chi-square]

Test

L �0.01��0.01�

S �0.01��0.01�

E �0.35�

S 0.28�0.93�

F �0.17�

H �0.96�

H �0.23�

H ��0.01�

F 0.02�0.02�

L ��0.01�

G �0.01�

L �0.01��0.01�

(continued on next page)

AuditR

eportLags

afterVoluntary

andInvoluntary

Auditor

Changes

679

Accounting

Horizons

Decem

ber2010

Am

ericanA

ccountingA

ssociation

TABLE 1

Comparison of Ex-Andersen (Non-Follower) Clients with other Auditor Change C

anel A: Descriptive Data: Mean (Median) Values of Variables for Fiscal Year 2002

ariable

Ex-Andersen (Non-Follower) Clients

(n � 198)

Other Big 5 Clients withAuditor Change

(n � 120)

AG 62.57 56.08�62.00� �49.00�

QLAG 7.76 7.26�7.72� �7.07�

XTRAORD 0.37 0.34�0.0� �0.0�

EGMENTS 1.41 1.33�1.0� �1.0�

OREIGN 0.31 0.26�0.0� �0.0�

IGROWTH 0.42 0.42�0.0� �0.0�

ILITIG 0.43 0.55�0.0� �1.0�

ITECH 0.30 0.41�0.0� �0.0�

INCOND 0.32 0.51�0.16� �0.53�

OSS 0.50 0.71�1.0� �1.0�

C 0.16 0.33�0.0� �0.0�

NTA 5.92 3.48�5.77� �3.08�

PM

FINCOND + �9LOSS + �10GC

V

nalysis of SQLAG in FY2003

ficient p-value

I .51 �0.01A .21 0.23E .49 0.04S .19 0.31F .10 0.53H .34 0.04H .04 0.72H .06 0.46F .23 �0.01L .32 0.10G .57 0.05L .04 0.42

Model F � 6.3p � 0.01

Adj. R2 = 0.16

P 0 other firms that had an auditor changew both 2002 and 2000 available in AuditAP oot of audit report lag �i.e., number ofd ariable is the change in square root oft x-Andersen clients that did not followt s ending December 31, 2002, �2� auditr he last regression �FY 2003� excludes,f


680Tanyi,R

aghunandan,andB

arua

Accounting

Horizons

Decem

ber2010

Am

ericanA

ccountingA

ssociation

anel B: Audit Report Lag Regression Resultsodel:

SQLAG = �0 + �1AA + �2EXTRAORD + �3SEGMENTS + �4FOREIGN + �5HIGROWTH + �6HILITIG + �7HITECH + �8

+ �11LNTA + error

ariable

Analysis of SQLAG in FY2002

Analysis of Change inSQLAG (FY2002–

FY2000)A

Coefficient p-value Coefficient p-value Coef

ntercept 7.30 �0.01 �0.20 0.62 7A 0.38 �0.01 0.14 �0.01 0XTRAORD 0.73 0.01 0.01 0.62 0EGMENTS 0.19 0.40 �0.52 0.11 0OREIGN �0.40 0.07 �0.09 0.85 �0IGROWTH �0.17 0.41 — — �0ILITIG 0.06 0.86 — — �0ITECH �0.39 0.19 — — �0INCOND 1.34 �0.01 0.45 �0.01 1OSS 0.26 �0.01 0.35 0.17 0C 0.26 0.43 0.81 0.04 0NTA �0.05 0.43 0.06 0.57 �0

Model F � 7.6 Model F � 3.5p � 0.01 p � 0.01

Adj. R2 = 0.17 Adj. R2 = .04

anel A provides descriptive data about 198 ex-Andersen clients that did not follow their former Andersen partner to the new audit firm and 12ith a Big4 predecessor in 2002. All firms included in the analyses had �1� fiscal years ending December 31, 2002, �2� audit report lag data fornalytics, and �3� accounting data available in Compustat to estimate the regression model.anel B provides the results from three regressions. In the regressions for fiscal years 2002 and 2003, the dependent variable is the square rays between fiscal year-end and the audit report date�. In the changes regression �i.e., the second of the three regressions�, the dependent vhe audit report lag �2002 minus 2000�. The sample for the first two regressions �for FY 2002 and the change from FY 2000� includes 198 eheir auditor and 120 other firms that had an auditor change with a Big 4 predecessor. All firms included in the analyses had �1� fiscal yeareport lag data for both 2002 and 2000 available in Audit Analytics, and �3� accounting data available in Compustat to estimate the model. Trom the preceding, five ex-Andersen clients and four non-Andersen clients that had an auditor change in 2003.

p

V

AuditR

eportLags

afterVoluntary

andInvoluntary

Auditor

Changes

681

Accounting

Horizons

Decem

ber2010

Am

ericanA

ccountingA

ssociation

-values are two-tailed.

ariable Definitions:LAG � number of days between fiscal year-end and the date of the audit opinion;

SQLAG � the square root of LAG;EXTRAORD � 1 if the firm has extraordinary items on its financial statement, 0 otherwise;SEGMENTS � the square of the number of business segments;

FOREIGN � 1 if the firm has foreign operations, 0 otherwise;HIGROWTH � 1 if the firm belongs to high-growth industries �two-digit SIC codes 35, 45, 48, 49, 52, 57, 73, 78, and 80�, 0 otherwise;

HILITIG � 1 if the firm belongs to industries �two-digit SIC codes 28, 35, 36, 38, and 73�, 0 otherwise;HITECH � 1 if the firm belongs to industries �three-digit SIC codes 283, 284, 357, 366, 367, 371, 382, 384, and 737�, 0 otherwise;

FINCOND � probability of bankruptcy estimated fromZmijewski’s �1984� model for nonfinancial firms;LOSS � 1 if the firm reports a loss before extraordinary items, 0 otherwise;

GC � 1 if the firm receives a going-concern opinion, 0 otherwise;LNTA � the natural log of total assets; and

AA � 1 of the firm is an ex-Andersen �non-follower� client, 0 otherwise.

rnEada

Htbwc

vt2atc

stpsccm

eiapc

P

llai

6

7


AA

Panel B of Table 1 provides results from three different regressions. The first regressionelates to fiscal year ending December 31, 2002, or the first year for ex-Andersen clients with theew auditor. The overall model is significant, with an adjusted R2 of 17 percent; the coefficients ofXTRAORD and FINCOND are positive and significant. The variable of interest, AA, is positivend significant �p � 0.01� indicating that when compared with other clients changing auditorsuring 2002 �with another Big 5 predecessor� the non-follower, ex-Andersen clients have a higherudit report lag for fiscal year 2002 after controlling for other factors.

A competing argument is that such ex-Andersen clients always had higher reporting lags.ence, we compute the change in audit reporting lag from fiscal year 2000 to fiscal year 2002 and

est if the change is different for ex-Andersen and other clients; we examine fiscal year 2000ecause that is the last full year prior to the disclosure of Andersen’s problems. For such analysis,e use the same model as the one above but instead of data for fiscal year 2002 we use the

orresponding values of audit report lag and the dependent variables from fiscal year 2000.The second regression in Panel B of Table 1 is the “changes” regression. The dependent

ariable here is the difference in square root of audit report lags of 2002 and 2000. The explana-ory variables—except AA—are changes in the levels of the independent variables �from 2002 to000�.6 The overall model is significant; FINCOND and GC have the expected coefficient signsnd are significant at conventional levels. The significant positive coefficient of AA indicates thathe change in audit report lag from 2000 to 2002 was higher for the non-follower, ex-Andersenlients compared to clients of other Big 5 auditors that changed auditors during 2002.7

The last regression in Panel B of Table 1 examines the audit reporting lag during 2003. Theample for this third regression excludes five ex-Andersen clients and four non-Andersen clientshat either had an auditor change in 2003 or had missing data for 2003. The coefficient of AA isositive but not significant at conventional levels in this regression. This suggests that by theecond year with the new auditor the ex-Andersen clients �who experienced an involuntary auditorhange� were not at a disadvantage compared to clients of other Big 5 firms that �voluntarily�hanged auditors during 2002. These findings suggest that the differential costs associated withandatory auditor changes �when compared to voluntary auditor� may be short-lived.

Overall, the results in Panel B of Table 1 indicate that the mandatory auditor change �i.e.,x-Andersen� clients: �1� had higher audit report lag for fiscal year 2002; and �2� had a greaterncrease in audit lag from 2000 to 2002, compared to clients of other Big 5 firms that had anuditor change during 2002. Together the results provide strong evidence in support of the hy-othesis that the non-follower ex-Andersen clients were treated by auditors differently than otherlients that switched from a Big 5 predecessor in fiscal year 2002.

artition of Ex-Andersen Clients by Follower StatusPanel A of Table 2 provides descriptive data about ex-Andersen clients, partitioned by fol-

ower status. The audit report lag for “follower” ex-Andersen clients is, on average, 4.56 daysower than for “non-follower” clients �58.01 versus 62.57�. The two subsamples do not differlong any of the other control variables, except that the “follower” group has a lower proportionn high-growth industries.

We measure changes, for the dependent and independent variables, from 2002 to 2000 �as opposed to vice versa� simplyfor the sake of expositional convenience.We also examined the regression for fiscal year 2000 using a “levels” approach—that is, we measured the level of thedependent and independent variables �as in the first regression for fiscal 2002� and used such variables in the regression.In such a regression, the AA coefficient is not significant in the fiscal year 2000 regression, confirming the findings fromthe “changes” regression.


P

V

p-values from t(median) [Chi-square]

Test

L �0.01��0.01�

S �0.01��0.01�

E �0.73�

S 0.81�0.92�

F �0.29�

H �0.34�

H �0.84�

H �0.93�

F 0.89�0.58�

L �0.82�

G �0.95�

L 0.86�0.33�


AuditR

eportLags

afterVoluntary

andInvoluntary

Auditor

Changes

683

Accounting

Horizons

Decem

ber2010

Am

ericanA

ccountingA

ssociation

TABLE 2

Comparison of Follower versus Non-Follower Ex-Andersen Clients

anel A: Descriptive Data: Mean (Median) Values of Variables for Fiscal Year 2002

ariableFollower Clients

(n � 186)Non-Follower Clients

(n � 198)

AG 58.01 62.57�57.00� �62.00�

QLAG 7.24 8.147�7.14� �7.62�

XTRAORD 0.34 0.37�0.0� �0.0�

EGMENTS 1.38 1.41�1.0� �1.0�

OREIGN 0.26 0.31�0.0� �0.0�

IGROWTH 0.40 0.42�0.0� �0.0�

ILITIG 0.41 0.43�0.0� �0.0�

ITECH 0.31 0.30�0.0� �0.0�

INCOND 0.35 0.32�0.27� �0.16�

OSS 0.48 0.50�0.0� �1.0�

C 0.13 0.16�0.0� �0.0�

NTA 5.80 5.92�5.66� �5.77�

PM

H + �8FINCOND + �9LOSS

V

nalysis of SQLAG in FY2003

ficient p-value

I .26 �0.01F .25 0.14E .30 0.28S .14 0.31F .19 0.29H .19 0.24H .13 0.50H .03 0.94F .68 0.01L .01 0.97G .89 0.01L .04 0.33

Model F � 4.0p � 0.01

Adj. R2 = 0.06

P“P oot of audit report lag �i.e., number ofd ariable is the change in square root oft n firms that had �1� fiscal years endingD e, and �4� accounting data available inC d an auditor change in 2003. FOLLOW�

Op

684Tanyi,R

aghunandan,andB

arua

Accounting

Horizons

Decem

ber2010

Am

ericanA

ccountingA

ssociation

anel B: Regression Resultsodel:

SQLAG = �0 + �1FOLLOW + �2EXTRAORD + �3SEGMENTS + �4FOREIGN + �5HIGROWTH + �6HILITIG + �7HITEC

+ �10GC + �11LNTA + error

ariable

Analysis of SQLAG in FY2002

Analysis of Change inSQLAG (FY2002–

FY2000)A

Coefficient p-value Coefficient p-value Coef

ntercept 7.14 �0.01 0.55 �0.01 7OLLOW �0.45 0.02 �0.16 �0.01 �0XTRAORD 0.53 0.01 0.54 0.02 0EGMENTS 0.20 0.15 0.10 0.07 0OREIGN �0.45 0.03 �1.58 0.23 �0IGROWTH �0.04 0.85 — — 0ILITIG �0.22 0.43 — — �0ITECH �0.17 0.53 — — 0INCOND 1.12 �0.01 1.07 �0.01 0OSS 0.17 0.38 0.09 0.14 0C 0.67 0.05 0.16 �0.01 0NTA �0.14 �0.01 �0.03 0.83 �0

Model F � 8.4 Model F � 3.1p � 0.01 p � 0.01

Adj.R2 = 0.16 Adj. R2 = 0.04

anel A provides descriptive data for fiscal year 2002 for ex-Andersen clients partitioned by “follower” status.Follower” firms followed their former Andersen partner to the new audit firm, while “non-follower” firms did not do so.anel B provides the results from three regressions. In the regressions for fiscal years 2002 and 2003, the dependent variable is the square rays between fiscal year-end and the audit report date�. In the changes regression �i.e., the second of the three regressions�, the dependent vhe audit report lag �2002 minus 2000�. The sample for the first two regressions includes 186 “follower” and 198 “non-follower” ex-Anderseecember 31, 2002, �2� audit report lag data for both 2002 and 2000 available in Audit Analytics, �3� information about FOLLOW availablompustat to estimate the model. The last regression �FY 2003� excludes, from the preceding, five ex-Andersen “non-follower” clients that ha1 if the client followed the Andersen partner to the new audit firm, 0 otherwise.

ther variables are defined as in Table 1.-values are two-tailed.

trst

looch

20sd

ba

awp

F

tfoa

tc0

aCct��

rm

F

fA


A

Panel B of Table 2 provides results from three different regressions. The dependent variable inhe first regression is the square root of the audit report lag for fiscal year 2002. The overallegression is significant, with an adjusted R2 of 16 percent. The FOLLOW variable is negative andignificant �p � 0.01�. This indicates that ex-Andersen clients who followed the Andersen partnero the new audit firm had significantly lower audit report lag for fiscal year 2002.

The second regression in Panel B of Table 2 has the change in square root of the audit reportag as the dependent variable; all control variables except for FOLLOW also are measured in termsf the change �value for fiscal year 2002 minus the corresponding value for fiscal year 2000�. Theverall model is significant, and the coefficient of FOLLOW is negative and significant. Thisonfirms that ex-Andersen clients who followed their former audit partner to the new audit firmad significantly lower audit report lag in the first year with the new audit firm.

The third regression in Panel B of Table 2 examines the audit reporting lag during fiscal year003 for the ex-Andersen clients. The coefficient of FOLLOW is negative but not significant �p �.14� in this regression. This indicates that the “follower effect” is also short-lived, and that by theecond year with the new auditor the non-follower ex-Andersen clients were not at a significantisadvantage compared to the follower ex-Andersen clients.

The above findings suggest that the differential costs associated with new audit partners maye short-lived. The results can also be viewed as indirectly providing evidence that the costsssociated with mandatory audit partner changes may be short-lived.

When the SEC was considering implementation of SOX Section 203 �relating to mandatoryudit partner rotation� the Big 4 and others provided input about the direct dollar costs associatedith mandatory audit partner rotation. Our results, focusing on audit report lag, provide anothererspective on the costs associated with mandatory audit partner rotation.

urther Analysis: Comparing No-Change Clients with Change ClientsWe compare audit report lags for clients without an auditor change in 2002 against the three

ypes of clients with auditor changes discussed above �non-Andersen changes, ex-Andersen “non-ollowers,” and ex-Andersen “followers”�. The no-change sample includes all other clients of thether Big 5 �non-Andersen� firms that meet the same selection criteria outlined earlier for theuditor change firms. This procedure yields a sample of 1,919 no-change firms.

The mean audit report lag for the no-change sample is 54.81 days; univariate t-tests indicatehat audit report lag for the no-change clients is marginally lower �p � 0.08� than for the voluntaryhange �i.e., change from a non-Andersen Big 5 predecessor� clients, and significantly lower �p �.01� than for either type of ex-Andersen clients �followers or non-followers�.

We then perform three different regressions examining audit report lag for 2002; the modelsre similar to those in Panel B of Tables 1 and 2, except that we now use a dummy variable calledHANGE �1 if there is an auditor change, 0 otherwise� to examine the effects of having an auditorhange on the audit report lag. The coefficient of CHANGE is marginally significant �p � 0.10� inhe regression comparing the no-change and non-Andersen change clients, but is highly significantp � 0.01� in the regression comparing the no-change clients and either type of ex-Andersenfollower or non-follower� clients.

Overall, the results indicate that voluntary auditor changes have a marginal effect on auditeport lags. The effects are magnified when the changes are involuntary, and are highest when theandatory auditor change also includes an audit partner change.

urther Analysis: Timing of Dismissal of Arthur AndersenSome clients dismissed Andersen even before the criminal indictment; conversely, at least a

ew ex-Andersen clients did not switch from Andersen until they were alerted by the SEC inugust 2002 that since Andersen was prohibited from being the certifying accountant, they had to


snActtaa

cssdpetpio

s2ttfrc

nbs�fc

ifc2c�

rlcdT


AA

witch. It is likely that the timing of Andersen’s dismissal will affect the audit report lag with theew auditor. Hence, we calculate the number of days from the end of the last fiscal year withndersen to the date when Andersen was dismissed. In the regression analyzing ex-Andersen

lients, we include a variable called TIMING measured as the square root of the number of dayso dismiss Andersen calculated as above. This new variable is positive and significant, indicatinghat those clients who took their time to dismiss Andersen and appoint a new auditor had longerudit delays for fiscal year 2002. Importantly, the FOLLOW variable continues to remain negativend significant in the regression �as in Table 2, Panel B�.

SUMMARY AND CONCLUSIONSLegislators and regulators have long expressed an interest in restricting auditor tenures be-

ause of perceptions that such long tenures can impair auditor independence. During the congres-ional hearings that preceded the enactment of SOX, mandatory auditor rotation was examined inome detail. Section 207 of SOX required the Comptroller General of the United States to “con-uct a study and review of the potential effects of requiring the mandatory rotation of registeredublic accounting firms.” Long before SOX, the Metcalf Committee �U.S. Senate 1976� report hadxpressed concerns about the effects of long audit firm tenure on auditor judgments. Periodically,he Securities and Exchange Commission �SEC� continued to express its concerns about theossible adverse effects from long auditor tenures �SEC 1994; Turner and Godwin 1999�. Thus, its clear that auditor tenure and mandatory auditor rotation has been, and continues to be, an issuef interest to legislators and regulators.

Some recent studies have examined the association between auditor tenure and various mea-ures, including audit opinions �Geiger and Raghunandan 2002�, abnormal accruals �Johnson et al.002; Myers et al. 2003�, and earnings response coefficient �Ghosh and Moon 2005�. The auditorenure variable in such studies is impacted by voluntary decisions made by the clients �to dismisshe auditor� or the auditor �to resign�. Nagy �2005� argues that the involuntary auditor changesollowing Andersen’s failure capture some elements of mandatory auditor rotation, and thus enableesearchers to provide empirical evidence about various issues �such as, auditor decisions, auditost, and audit quality� arising from involuntary auditor changes.

Opponents of mandatory auditor rotation argue that involuntary auditor changes impose sig-ificant costs and that there is a steep learning curve associated with new audit engagements,ecause effective audits require a thorough understanding of the client’s business and processes;uch understanding develops over time and there is a learning curve that lasts a year or moreGAO 2003�. In this study we provide empirical evidence about the extent of the extra audit workollowing involuntary auditor changes by examining audit reporting lags after the forced auditorhanges arising from Andersen’s demise.

Some ex-Andersen clients followed their former Andersen partner to the new audit firm—thats, there was an auditor change in form but perhaps not in substance. Hence, we compare “non-ollower” �that is, not following the former Andersen partner to the new audit firm� ex-Andersenlients with other clients that switched from another �non-Andersen� Big 5 predecessor during002. Our hypothesis is that audit report lag would be greater for non-follower ex-Andersenlients in their first full year with the successor auditor than for clients who switched from anothernon-Andersen� Big 5 audit firm.

We test our hypothesis using data for the fiscal year ending December 31, 2002. The empiricalesults indicate that the non-follower ex-Andersen clients had a significantly longer audit reportag for fiscal year 2002 than clients that switched from another �non-Andersen� Big 5 auditor, afterontrolling for other factors associated with audit report lag. However, there were no significantifferences in audit report lags between the two groups of firms during fiscal years 2000 or 2003.ogether, the results indicate that the clients who experienced in substance a forced auditor change


hvd

tptt“

eerMnaastoo

A

B

C

C

D

FG

G

G

J

K

K

8


A

ad a higher audit reporting lag during the year of the change when compared with clients thatoluntarily changed auditors.8 The results also indicate that the effect is relatively short-lived andoes not persist beyond the first year.

Some recent studies have examined if ex-Andersen clients who followed their audit partner tohe new audit firm were treated differently than ex-Andersen clients who did not follow theartner. We argue that familiarity with the audit partner would lead to a lower audit report lag forhe “follower” clients when compared with clients that did not follow the former Andersen partnero the new audit firm. Our analysis indicates that the audit report lag was significantly lower forfollower” ex-Andersen clients than for “non-follower” clients.

Our findings reinforce the importance of personal relationships in auditing, and suggest thatxamining the effect of individual relationships in other auditing settings may be worthwhile. Forxample, Section 203 of SOX requires audit partner rotation; the SEC �2003� subsequently issuedules related to the rotation of lead and concurring audit partners for fiscal years beginning after

ay 6, 2003. Will the audit report lag be higher when there is a partner rotation pursuant to theew SEC rules? More generally, to what extent does partner familiarity with the client affectuditor actions and judgments in a variety of audit contexts? The other side of partner changes isuditor familiarity with individual executives; hence, one can think about auditor familiarity withpecific individuals serving as the CFO or CEO affecting audit judgments. This is also relevant inhe context of auditors’ evaluations of “tone at the top.” To what extent does turnover of the CEOr CFO affect audit judgments, such as those related to audit program planning, nature and extentf testing, and audit opinions? These are some interesting issues for future research.

REFERENCES

shton, R. H., P. R. Graul, and J. D. Newton. 1989. Audit delay and the timeliness of corporate reporting.Contemporary Accounting Research 5 �2�: 657–673.

louin, J., B. Grein, and B. Rountree. 2007. An analysis of forced auditor change: The case of former ArthurAndersen clients. The Accounting Review 82 �May�: 621–650.

ahan, S. F., and W. Zhang. 2006. After Enron: Auditor conservatism and ex-Andersen clients. The Account-ing Review 81 �January�: 49–82.

hoi, C. H., and R. Doogar. 2005. Auditor tenure and audit quality: Evidence from going-concern qualifi-cations issued during 1996–2001. Working paper, Hong Kong University of Science and Technology.

avis, L. R., B. Soo, and G. Trompeter. 2009. Auditor tenure and the ability to meet or beat earningsforecasts. Contemporary Accounting Research �Summer�: 517–548.

lanigan, J. 2002. Andersen’s pain will strengthen system. Los Angeles Times �March 24�: C, 1.eiger, M. A., and K. Raghunandan. 2002. Auditor tenure and audit reporting failures. Auditing: A Journal

of Practice & Theory 21 �March�: 67–78.eneral Accounting Office �GAO�. 2003. Public Accounting Firms: Mandated Study on Consolidation and

Competition. GAO-03–864. Washington, DC: GAO.hosh, A., and D. C. Moon. 2005. Auditor tenure and perceptions of audit quality. The Accounting Review

80 �April�: 585–612.ohnson, V. E., I. K. Khurana, and J. K. Reynolds. 2002. Audit-firm tenure and the quality of financial

reports. Contemporary Accounting Research 19 �Winter�: 637–660.ohlbeck, M., B. Mayhew, P. Murphy, and M. Wilkins. 2008. Competition for Andersen’s clients. Contem-

porary Accounting Research 25 �Winter�: 1099–1136.rishnan, J., K. Raghunandan, and J. Yang. 2007. Were former Andersen clients treated more leniently than

A limitation of our study is that the higher audit report lag could also be because successor auditors may have wantedto be more careful or do extra audit work for former Andersen clients if ex-Andersen clients were perceived as beingriskier than other new audit clients or due to perceptions that Andersen audits were of lower quality.


http://dx.doi.org/10.1111/j.1911-3846.1989.tb00732.x

http://dx.doi.org/10.2308/accr.2007.82.3.621



http://dx.doi.org/10.1506/car.26.2.8

http://dx.doi.org/10.2308/aud.2002.21.1.67



http://dx.doi.org/10.1506/LLTH-JXQV-8CEW-8MXD



—

L

M

M

N

P

S

—

—

—

—

T

—

U

U

—

V

—

Z


AA

other clients? Evidence from going-concern modified audit opinions. Accounting Horizons �Decem-ber�: 423–435.

—–, and J. Yang. 2009. Recent trends in audit report and earnings announcement lags. Accounting Hori-zons �September�: 265–288.

oebbecke, J. K., M. M. Eining, and J. J. Willingham. 1989. Auditors’ experience with material irregularities:Frequency, nature, and detectability. Auditing: A Journal of Practice & Theory �Fall�: 1–28.

autz, R. K., and H. A. Sharaf. 1961. The Philosophy of Auditing. American Accounting AssociationMonograph No. 6. Sarasota, FL: American Accounting Association.

yers, J. N., L. A. Myers, and T. C. Omer. 2003. Exploring the term of the auditor-client relationship and thequality of earnings: A case for mandatory auditor rotation? The Accounting Review 78 �July�: 779–800.

agy, A. L. 2005. Mandatory audit firm turnover, financial reporting quality, and client bargaining power:The case of Arthur Andersen. Accounting Horizons �June�: 51–68.

ublic Accounting Report �PAR�. 2002. Special Section: Guilty Verdict for Andersen. River Woods, IL: CCHIncorporated.

ecurities and Exchange Commission �SEC�. 1994. Staff Report on Auditor Independence. Washington,D.C.: SEC.

—–. 2002a. Requirements for Arthur Andersen LLP Auditing Clients. Release Nos. 33-8070, 34-45590.Washington, D.C.: SEC.

—–. 2002b. Proposed Rule: Acceleration of Periodic Report Filing Dates and Disclosure ConcerningWebsite Access to Reports. Release Nos. 33-8089, 34–-45741. Washington, D.C.: SEC.

—–. 2002c. Final Rule. Acceleration of Periodic Report Filing Dates and Disclosure Concerning WebsiteAccess to Reports. Release Nos. 33-8128, 34-46464, FR-63. Washington, D.C.: SEC.

—–. 2003. Final Rule. Strengthening the Commission’s Requirements Regarding Auditor Independence.Release Nos. 33-8183, 34-47265, FR-68. Washington, D.C.: SEC.

urner, L. E. 2002. H.R. 3763—The Corporate and Auditing Accountability, Responsibility, and Transpar-ency Act of 2002. Hearings before the Committee on Financial Services. �March 13, 20, April 9, 2002�.Washington, D.C.: U.S. House of Representatives.

—–, and J. H. Godwin. 1999. Auditing, earnings management, and international accounting issues at theSecurities and Exchange Commission. Accounting Horizons 13 �September�: 281–297.

.S. House of Representatives Committee on Financial Services. 2002. Sarbanes-Oxley Act of 2002. PublicLaw No. 107–204. Washington, D.C.: Government Printing Office.

.S. Senate. 1976. The Accounting Establishment. A Staff Study. Subcommittee on Reports, Accounting, andManagement of the Committee on Government Operations. Washington, D.C.: Government PrintingOffice.

—–. 2002. Oversight Hearing on “Accounting and Investor Protection Issues Raised by Enron and OtherPublic Companies.” Committee on Banking, Housing and Urban Affairs. U.S. Senate �February 12,26, 27; March 6, 14, 19, 20, 21�. Washington, D.C.: Government Printing Office.

ermeer, T. 2008. Market for former Andersen clients: Evidence from government and non-profit sectors.Journal of Accounting and Public Policy 27: 394–408.

—–, D. Rama, and K. Raghunandan. 2008. Partner familiarity and audit fees: Evidence from formerAndersen clients. Auditing: A Journal of Practice & Theory 27 �November�: 217–219.

mijewski, M. E. 1984. Methodological issues relating to the estimation of financial distress predictionmodels. Journal of Accounting Research 22 �Supplement�: 59–82.


http://dx.doi.org/10.2308/acch.2007.21.4.423






http://dx.doi.org/10.1016/j.jaccpubpol.2008.07.001


http://dx.doi.org/10.2307/2490859

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Documents

Meeting 13 4