Are the Reputations of the Large Accounting Firms Really International? Evidence from the Andersen‐Enron Affair

SUMMARY: This paper investigates the stock price reaction of Andersen's non‐U.S. clients around two key dates leading up to Andersen's demise, i.e., January 10, 2002, when Andersen announced it had shredded documents related to the Enron audit, and February 4, 2002, when Enron's board released a report (the Powers report) that was critical of Andersen and when Andersen established an Independent Oversight Board to examine the firm's audit practice. We find that the cumulative abnormal return for the two dates is negative and significant which suggests that concerns about Andersen's reputation and audit quality spilled over to other countries outside the U.S. We find that the market reaction is more significant when there is a greater demand for assurance, e.g., in common law countries and firms with large changes in total accruals or with new debt or equity issues. In further analyses, we use Andersen's non‐U.S. clients that are cross‐listed in the U.S. to separate out possible assurance and insurance effects. When Andersen's non‐U.S., cross‐listed clients are compared with Andersen's U.S. clients, we find similar cumulative abnormal returns. Since this test controls for insurance exposure in the U.S. market, our results suggest a similar assurance effect whether the client is audited by Andersen's U.S. unit or one of its non‐U.S. units.