Information uncertainty and auditor reputation

• Published in: Journal of banking & finance Vol. 33; no. 2; pp. 183 - 192
• Main Authors: Autore, Don M., Billingsley, Randall S., Schneller, Meir I.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.02.2009; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Banking & Finance
• Subjects: Accountants; Arthur Andersen; Auditing; Auditor reputation; Auditors reports; Big Five accounting firms; Business reputation; Capital market; Contagion; Correlation analysis; Financial information; Information; Information uncertainty; Information uncertainty Auditor reputation Contagion Arthur Andersen; Obstruction of justice; Reputations; Stock prices; Studies; Uncertainty; United States > US; Arthur Andersen; Information uncertainty; Contagion; M42; G14; Auditor reputation
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2008.07.011

This paper explores the relationship between information uncertainty and auditor reputation revealed by the failure of Arthur Andersen (AA). AA’s reputation deteriorated considerably when it announced on January 10, 2002, that it had shredded documents related to its audit of Enron. AA’s demise was sealed on March 14, 2002, with its indictment for obstruction of justice. We find that on these dates the clients of AA and other Big Five auditors that are characterized by higher information uncertainty experience relatively larger share price declines compared to clients with lower information uncertainty. The findings suggest that the market relies more heavily on auditor reputation for higher information uncertainty firms, which implies that the value of an audit is greater when a firm is harder to value. Our results highlight the importance of information uncertainty in financial markets: where there is a shock to auditor reputation, firms with greater information uncertainty suffer the largest losses.