Accounting Firm Office Level Cultural Dynamics: Exploring Differences in Audit Reporting and Quality Following the Implosion of Arthur Andersen.

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Abstract

This paper situates audit quality as an outcome of organizational culture. It argues that when a firm undergoes extreme events that constitute organizational change, audit outcomes will also be changed. We study the aftermath of the Arthur Andersen demise – a unique setting - to examine the effect of acquiring a competing Andersen practice, including clients and personnel, on local acquiring office’s restatement rates, client earnings management, and audit timeliness. Results of difference-in-difference analyses indicate that offices of the remaining Big 4 and non-Big 4 firms that acquired and incorporated Andersen clients and personnel into their audit practices saw lower restatement risk, higher accruals quality, and more timely audits (lower ARL) as compared to offices that did not acquire any Andersen clients and therefore did not undergo the same cultural and organizational change. These findings have significant implications for our understanding of both audit quality as an outcome of organizational culture and office-level audit quality differences post-Andersen.

Authors

• Timothy J Fogarty, Case Western Reserve University

• R. Drew Sellers, Kent State University - Kent

• Aleksandra B Zimmerman, Northern Illinois Universtiy