Summary
The accounting scandals and the demise of Andersen have increased auditors’ ex ante business risk. As a result, stock markets revised downward the value of the external audit (Callen and Morel (2002); Chaney and Philipich (2002); Krishnamurthy et al. (2002); Asthana et al. (2003)). One commonsensical reaction on behalf of auditors should have been to apply the existing rules more carefully and, thus, issue more non-clean opinions on the financial statements they have audited. This is exactly what we see. Closer scrutiny reveals that the higher incidence of non-clean audit opinions is not due to the (substantial) changes in the audit client list or their balance sheets. This study mirrors earlier results where auditors relaxed their standards following a drop in business risk (Geiger and Raghunandan, (2001), (2002); Francis and Krishnan, (2002)).
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Authors are listed just by alphabetical order. We gratefully acknowledge useful comments from participants at the 2004 American Accounting Association Midyear Auditing Section conference, and outstanding suggestions from an anonymous referee for De Economist. Any remaining errors are ours.
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Sercu, P., Vander Bauwhede, H. & Willekens, M. Post-Enron Implicit Audit Reporting Standards: Sifting through the Evidence. De Economist 154, 389–403 (2006). https://doi.org/10.1007/s10645-006-9016-z
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DOI: https://doi.org/10.1007/s10645-006-9016-z
Keywords
- Auditor reporting
- qualified/modified opinion
- Enron
- Andersen Data availability: All data are publicly available