Post-Enron implicit audit reporting standards: sifting through the evidence.

Abstract

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 audit firms (Asthana et al. 2003; Chaney and Philipich 2002; Krishnamurthy et al. 2002; Callen and Morel 2002). One commonsensical reaction on behalf of auditors should have been to apply the existing rules more carefully and, thus, issue more non-clean audit opinions. 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. Instead, shifts in the client characteristics seem to have masked the Enron effect, and especially so in the non-Big5 sample. 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).Andersen; Auditor reporting; Enron; Modified opinion; Qualified opinion; Reporting; Research;