Fool Me Once, Shame on You; Fool Me Twice, Shame on Me: The Long-Term Impact of Arthur Andersen's Demise on Partners' Audit Quality

• 成果类型: Article
• 署名作者: Guo, Feng; Lisic, Ling Lei; Pittman, Jeffrey; Seidel, Timothy A.; Zhou, Mi; Zhou, Ying
• 署名单位: Iowa State University; Virginia Polytechnic Institute & State University; Memorial University Newfoundland; Brigham Young University; Virginia Commonwealth University; University of Connecticut
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12773
• 发表日期: 2022
• 页码: 1986-2022
• 关键词: industry expertise; SELF-AFFIRMATION; RISK; experiences; conservatism; fees; determinants; marginality; assessments; COMPETITION

摘要

Although recent evidence suggests that individual audit partners explain a substantial portion of the variation in audit quality proxies, much less is known about what determines an audit partner's quality. Psychology and behavioral economics theories hold that an individual's experiences can have enduring impacts on subsequent behavior. We examine whether auditors' direct exposure to Arthur Andersen's collapse has a long-term impact on the quality of their audits. Our evidence implies that audit partners who directly experienced Andersen's demise impose stricter monitoring evident in their clients exhibiting a lower propensity for misstatements and small profits, and paying higher audit fees. Importantly, these findings reconcile with research in finance and economics implying that firsthand experiences matter more to subsequent behavior than general economic conditions or secondhand or thirdhand experiences. Collectively, the results shed light on one facet of how partners' audit quality evolves over time. Our findings suggest that major failures associated with the audit firm in which an auditor works can ultimately result in these affected individuals later delivering higher audit quality, which should benefit audit committees in partner selection decisions and audit firms in designing partner assignment policies.