Was Andersen’s audit quality lower than its peers? A comparative analysis of audit quality

Abstract

Purpose

This paper aims to examine whether Andersen’s audit quality in the five years preceding its collapse lagged that of other Big-Five auditors.

Design/methodology/approach

This paper compares Andersen’s audit quality and the other Big-Five auditors using five methodologies, namely, earnings response coefficients, magnitudes of abnormal accruals, propensities to issue going-concern opinions, usefulness of going-concern opinions in predicting bankruptcy and the frequency of Accounting and Auditing Enforcement Releases. The comparisons are based on both pooled samples of all observations and propensity-score-based matched-pairs.

Findings

The preponderance of evidence shows that Andersen’s audit quality did not differ materially in audit quality from other Big-Five auditors prior to its failure. However, it was found that Andersen’s independence was compromised in the year leading to its collapse (2000), as indicated by the lower likelihood to issue going-concern opinions.

Originality/value

This paper complements and improves on Cahan et al. (2011) by using more measures of audit quality, as no one measure is perfect, showing that their results using discretionary accruals are sensitive to the model used and showing that there is a more powerful direct measure of audit quality, namely, going-concern opinions.

Citation

Kumar, K. and Lim, L. (2015), "Was Andersen’s audit quality lower than its peers? A comparative analysis of audit quality", Managerial Auditing Journal, Vol. 30 No. 8/9, pp. 911-962. https://doi.org/10.1108/MAJ-10-2014-1105