In this article we investigate the impact of the Enron audit failure on auditor reputation. Specifically, we examine Arthur Andersen’s clients’ stock market impact surrounding various dates on which Andersen’s audit procedures and independence were under severe scrutiny. On the three days following Andersen’s admission that a significant number of documents had been shredded, we find that Andersen’s other clients experienced a statistically negative market reaction, suggesting that investors downgraded the quality of the audits performed by Andersen. We also find that audits performed by Andersen’s Houston office suffered a more severe decline in abnormal returns on this date. We are not able to show that Andersen’s independence was questioned by the amount of non–audit fees charged to its clients.

J. L. G. Board, M. Walker, Intertemporal and Cross-Sectional Variation in the Association between Unexpected Accounting Rates of Return and Abnormal Returns, Journal of Accounting Research, Vol. 28, No. 1 (Spring, 1990), pp. 182-192

Auditing, Substantive test, Sampling, Accounting population

Auditing, Sampling, Substantive test, Compliance

Executive compensation, Employee stock option, Calculation, Option pricing model

R&D, Materiality, Capitalization, Resource allocation decision

We use incremental and joint implementation of multiple SOX‐based control effectiveness disclosure and audit mandates to assess relative performance of alternatives for small U.S. public companies. Using data from several low‐ and high‐effort management disclosure and audit regimes implemented from 2003 to 2008, we find substantial and statistically significant increases in material weakness disclosure rates for small firms undergoing initial SOX 404(b) internal control audits, but find quantitatively and statistically similar increases for initial management reports of small firms exempt from such audits. As to audit cost, fees more than double for initial 404(b) audits in 2004 and remain high, while 404(b)‐exempt firms’ fees grow about 10% annually. Our results support the view that, for small firms, management internal control reports and traditional financial audits may be a cost effective disclosure alternative to full application of SOX 404(b). Also, our results suggest that, even without management reports on internal control, analysis of the cause of known accounting mistakes may yield substantial material weakness disclosures.

Frank K. Reilly, David L. Morgenson, Marilyn West, The Predictive Ability of Alternative Parts of Interim Financial Statements, Journal of Accounting Research, Vol. 10, Empirical Research in Accounting: Selected Studies 1972 (1972), pp. 105-124

We investigate executive employment gaps (hereafter, gaps) between the appointment of an external CEO at a public firm and the individual's prior executive position at a public company. These gaps cannot be reliably obtained from common databases. We hand‐collect data for externally hired CEOs at public companies from 1992 to 2014. These CEOs represent approximately 40% of the 5,095 CEO successions and have a mean gap of 1.9 years. The gap increases to 3.2 years for the subset of new hires with a gap. We hypothesize that labor market frictions and executive skill sets contribute to the existence and length of these gaps. Using theories from labor economics, we predict (equilibrium) associations between two measures of “fit” (executive compensation and long‐term match quality) and gaps (both existence and length). Finally, we provide descriptive evidence on what executives do (e.g., sit on boards, work for private consulting companies, or consume leisure) during their gaps. This project was subject to and published through a registered report process. Any tests that were not included in the accepted proposal are marked as unplanned analyses.

How can features of the markets for audit and nonaudit services (NAS) affect an audit firm's incentives to invest in audit quality, average audit quality, and social welfare? We address these questions in a model focusing on competition in both audit and NAS markets. We show that, when audit and NAS demand are positively correlated, prohibiting auditors from providing NAS to audit clients leads to higher investments in audit quality, but can decrease average audit quality if marginal clients switch to lower quality auditors. The effect on social welfare can be positive or negative, depending on the distribution of clients' service demands. General bans on auditor provision of NAS can, via similar channels, increase or decrease audit quality and social welfare. Overall, our findings suggest a more nuanced view of how regulating an auditor's provision of NAS might affect audit quality and social welfare, and are driven by the effects of multimarket competition on the auditor's incentives to invest in audit quality, rather than previously identified auditor independence or knowledge spillover channels.