The Impact of Audit Partners’ First-Hand Experience with Arthur Andersen’s Demise on Their Style

• In Event: Audit Partner Expertise and Experience

Abstract

The increase in disclosure about the persons conducting audits has led to a steep rise in research examining the role that individual audit partner styles play in audit outcomes. Although recent evidence suggests that individual audit partner styles explain a substantial portion of the variation in audit quality proxies, much less is known about what determines an audit partner’s style. Psychology and behavioral economics theories hold that an individual’s experiences can have enduring impacts on subsequent behavior. We examine whether auditors’ first-hand experience with the Andersen demise affects their auditing style. We find that audit partners who experienced Andersen’s demise first-hand impose stricter monitoring of the financial reporting process evident in their clients exhibiting lower absolute discretionary accruals and paying higher audit fees. In another set of results consistent with our predictions, these effects are concentrated among partners who are currently working in non-Big Four audit firms. Additional results imply that these effects are more pronounced among clients of partners who worked in Andersen’s Houston office and who were at an earlier career stage at the time of Andersen’s demise. Supplementary analyses suggest that both conservative auditing style and client screening play a role in explaining the higher audit quality of partners who experienced Andersen’s demise first-hand.

Authors

• Timothy Andrew Seidel, Dr.

• Jeffrey Pittman, Memorial University of Newfoundland

• Ling Lei Lisic, Virginia Tech

• Feng Guo, University of Kansas

• Mi Zhou, Virginia Commonwealth University