After enron: Auditor conservatism and ex-Andersen clients

This study examines whether after Arthur Andersen's demise, successor auditors required more conservative accounting for their ex-Andersen clients in order to minimize litigation risk. We use unadjusted and performance-adjusted measures of abnormal accruals, and we examine the level of and changes in the abnormal accruals of ex-Andersen clients in 2002 relative to a control sample of clients that were audited by a Big 4 auditor in 2001 and 2002. We conduct univariate and multivariate tests. In our multivariate tests, we control for other factors that may affect litigation risk cross-sectionally. Our results indicate that the ex-Andersen clients had lower levels of and larger decreases in abnormal accruals in 2002. This is consistent with auditor conservatism and suggests the successor auditors viewed an Andersen audit as a unique source of litigation risk.