The Enron-Andersen Debacle: Do Equity Markets React to Auditor Reputation?

Abstract

The Enron-Andersen debacle provides a unique opportunity to investigate whether equity prices impound auditor reputation. We address this issue by comparing the daily stock returns of a sample of Andersen audit clients with those of a control sample of big five non-Andersen audit clients during the months of October 2001 through January 2002. These four months are characterized by events that negatively impacted upon Andersen's reputation such as Enron's bankruptcy and the shredding of Enron documents by Anderson employees. The empirical results are not clear cut. Univariate and regression results indicate that event day abnormal returns and twoday cumulative abnormal returns are generally not significantly different from zero for both Andersen and non-Andersen audit clients. On the other hand, cumulative abnormal returns over all event days are marginally significantly negative for the Andersen sample and insignificantly negative for the non-Andersen control sample. There is some evidence that events directly related to Andersen had a larger negative impact on stock returns than events directly related to Enron. The data also suggests that the Enron affair had a negative spillover effect on non-Andersen big five audit clients. In terms of economic significance, the Andersen sample lost about 4% more than the non-Andersen sample in risk-adjusted returns over the events in the four month period.