Social responsibility and corporate reputation: The case of the Arthur Andersen Enron audit failure

• Published in: Journal of accounting and public policy Vol. 29; no. 2; pp. 160 - 176
• Main Authors: Linthicum, Cheryl, Reitenga, Austin L., Sanchez, Juan Manuel
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.03.2010; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Accounting and Public Policy
• Subjects: Accounting; Accounting firms; Administrative responsibility; Arthur Andersen and company; Audit failure; Auditing; Audits; Business ethics; Business reputation; Corporate reputation; Corporations; Correlation analysis; Enron corporation; Enterprises; Ethics; Expenditure; Investors; Rates of return; Regulation; Reputations; Scandals; Social responsibility; Social responsibility Corporate reputation Audit failure; Social responsibility of business; Studies; U.S.A; Value; United States > US; M14; G11; G34; Corporate reputation; M42; G14; Audit failure; Social responsibility
• ISSN: 0278-4254; 1873-2070
• DOI: 10.1016/j.jaccpubpol.2009.10.007

We examine the influence of social responsibility ratings on market returns to Arthur Andersen (AA) clients following the Enron audit failure. Chaney and Philipich (2002) found that AA’s loss of reputation resulted in negative market returns to AA clients following the Enron audit failure. Proponents of social responsibility argue that social responsibility can improve the reputation of the firm, while detractors argue that social responsibility expenditures are a poor use of shareholder money. If social responsibility sends a signal to investors regarding the reputation/ethics of management, social responsibility could mitigate the negative returns to AA clients following the Enron audit failure. Using a matched sample of AA and non-AA firms, we do not find evidence that social responsibility mitigated the negative returns to AA clients following the Enron audit failure. Our results are inconsistent with claims that social responsibility can burnish a firm’s reputation in a time of crisis and with prior research indicating a positive relationship between social responsibility and market value.