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SUMMARY We use proprietary archival data to examine one annually inspected audit firm's experience with the PCAOB inspection process. We find that the firm's audits are primarily selected for inspection due to client characteristics, while deficiencies identified by inspectors are related to characteristics of both the client and the audit team. We also find that not all identified audit deficiencies are reported to the public. However, we find some evidence that only publicly disclosed deficiencies are associated with ex post measures of audit quality, suggesting that the PCAOB releases only the most relevant and material information to the public. Finally, we find that inspections affect the concurrent year's audit team staffing decisions and reduce the proportion of the audit that is completed during the interim period. Overall, our study provides important insights into the PCAOB inspection process while also developing and validating a model of inspection risk for future researchers.

SUMMARY In this study, we investigate the financial reporting behavior of chief financial officers (CFOs) with significant prior audit experience. Our tests indicate that, on average, CFOs who were former audit managers or partners report less aggressively than CFOs without prior audit experience. Thus, the mindset that auditors develop during their time in public accounting—which should value objective, transparent, and conservative financial reporting—appears to persist when auditors take high-level positions in industry. However, we also find that the reporting behavior of prior-auditor CFOs becomes more aggressive over time as the salience of their audit experience decays. Further, we find that audit fees are lower for clients with prior-auditor CFOs but increase as the CFOs' time away from auditing increases. Overall, our study offers important insights regarding how audit experience is associated with the financial reporting behavior of CFOs. Data Availability: All data used are publicly available.

Using proprietary data from a global accounting firm, we investigate the determinants of auditors’ interim effort as well as the impact of interim effort on audit quality, client disclosure timeliness, audit hours, and audit fees. Public statements from accounting firms and regulators suggest various benefits from accelerating auditor effort, but these claims remain largely untested. We find that interim effort is higher for large, complex clients that require integrated audits of both financial statements and internal control over financial reporting. With respect to consequences, we find that allocating relatively more work to the interim period is associated with a reduced likelihood of late 10-K filings, decreased total audit hours, and higher fees. Although increasing interim period effort is not, on average, associated with a reduced likelihood of misstatement, we do find that current period material weaknesses are less likely with greater interim work. Thus, greater interim effort appears to facilitate the remediation of internal control deficiencies before year-end. We also show that the benefits of increased interim period effort allocation are much stronger – including improved audit quality – when manager and partner interim involvement is high. Overall, our study provides important new insights on audit production and highlights benefits of reduced hours for auditors, earlier identification of control deficiencies for clients, and more timely financial reports for investors.

SYNOPSIS We survey over 700 auditors about audit workloads and the relationship between audit workloads, perceived audit quality, and job satisfaction. Our findings indicate that auditors are working, on average, five hours per week above the threshold at which they believe audit quality begins to deteriorate and often 20 hours above this threshold at the peak of busy season. Survey respondents cite deadlines and staffing shortages as two of the primary reasons for high workloads and further believe that high workloads result in decreased audit quality. We also find that auditors' job satisfaction is negatively impacted by high audit workloads, particularly when the workloads exceed a threshold that is perceived to impair audit quality. Overall, our findings provide support for the PCAOB's concern that heavy workloads are continuing to threaten audit quality, and suggest that the primary drivers of workloads might be the actual “root cause” of workload-related audit deficiencies. JEL Classifications: M42; M12.

SUMMARY This article summarizes “How Do Auditors Respond to FCPA Risk?” (Lawson, Martin, Muriel, and Wilkins 2019), which investigates the pricing of audits for clients that violate the Foreign Corrupt Practices Act (FCPA). FCPA compliance has become a top priority for regulators who rely heavily on accountants as they combat illegal activity. We find that auditors charge higher fees for violators both before and during formal FCPA investigations. We also find that fees are more sensitive to accounts that are more susceptible to FCPA risk. Our findings are stronger (weaker) for clients with high (low) foreign sales. While this may seem intuitive from an audit materiality perspective, regulators are not required to prove materiality as they pursue FCPA violations (Ebright 2016). Our study should be of interest to practitioners and auditors, as the Public Company Accounting Oversight Board (PCAOB) is considering whether updates should be made to PCAOB AS 2405

Recent amendments to Auditing Standard (AS) 3101 require disclosure of the initial year of the auditor-client relationship in the audit report. As the standard was being discussed, auditors, clients, and some PCAOB members expressed reservations about the necessity of tenure disclosures and were particularly concerned about disclosing tenure in the audit report. Our purpose is to investigate whether the tenure disclosures mandated by AS 3101 are associated with changes in stakeholder behavior. We predict and find that after the implementation date, ratification votes against the auditor and the probability of subsequent auditor dismissal increase for long-tenured versus short-tenured auditors. Results from a path analysis further suggest that the relative increase in dismissal for long-tenured auditors appears to be influenced directly through tenure disclosures and indirectly through ratification voting. We also predict and find that negotiating power decreases for long-tenured auditors as evidenced by lower audit fees. Our results are comparable for companies that voluntarily disclosed and companies that did not disclose auditor tenure in their proxy statements prior to the AS 3101 amendment. Overall, our study suggests that mandatory disclosure of auditor tenure in the audit report significantly affects stakeholder behavior. The PCAOB should consider our findings carefully as they evaluate whether AS 3101 is achieving its intended purpose.

SUMMARY The valuation allowance for deferred tax assets is an audited disclosure that reflects management’s expectations regarding the future profitability of a company. Building on prior literature that establishes this disclosure as an indicator of future distress, we examine whether the valuation allowance is associated with auditors’ going concern evaluations. We find evidence that the existence and magnitude of the valuation allowance, as well as changes in the allowance, are positively associated with the likelihood that a company receives a first-time going concern opinion. We also find some evidence that valuation allowances are associated with reduced Type I and Type II going concern opinion misclassifications. Our results suggest that the information related to management’s plans and expectations that is reflected in the valuation allowance is incrementally relevant to auditors in their assessment of a company’s likelihood of failure. Data Availability: Data are available from the public sources cited in the text.

We use U.S. data from a global accounting firm to investigate how two key elements of audit teams –workloads and staffing continuity – affect the audit. We find that heavier team workloads are associated with lower audit quality, particularly when team members have lower performance ratings or have total workloads that exceed 60 h per week. In addition to finding evidence of employee burnout, we also document an incremental distraction effect. Specifically, we find that audit quality on the primary client suffers when team members spend more time during busy season on other concurrent clients. Regarding continuity, we find that greater year-over-year team staffing continuity is associated with improved audit quality, efficiency, and profitability. These effects are strongest when returning team members are highly rated or work in smaller audit offices. Finally, the effects of workload and continuity on audit quality at the team level are driven by audit seniors and audit staff, suggesting that offices should be particularly careful as they develop schedules for junior auditors. Overall, our study provides important new evidence about audit teams as called for by academics and regulators.

This article describes the process one university followed to develop an efficient way of collecting information related to faculty engagement, innovation, and impact. The purpose of the document (i.e., the tracking record) is to facilitate the production of effective Association to Advance Collegiate Schools of Business (AACSB) Self-Evaluation Reports and Continuous Improvement Review Reports. The experiences recorded and the sample tracking record provided will be of use to accreditation directors, associate deans, and deans across a wide range of universities as they prepare for initial accreditation or maintenance of accreditation under the 2013 AACSB Standards.

We use U.S. data from a global accounting firm to investigate how two key elements of audit teams –workloads and staffing continuity – affect the audit. We find that heavier team workloads are associated with lower audit quality, particularly when team members have lower performance ratings or have total workloads that exceed 60 hours per week. In addition to finding evidence of employee burnout, we also document an incremental distraction effect. Specifically, we find that audit quality on the primary client suffers when team members spend more time during busy season on other concurrent clients. Regarding continuity, we find that greater year-over-year team staffing continuity is associated with improved audit quality, efficiency, and profitability. These effects are strongest when returning team members are highly rated or work in smaller audit offices. Finally, the effects of workload and continuity on audit quality at the team level are driven by audit seniors and audit staff, suggesting that offices should be particularly careful as they develop schedules for junior auditors. Overall, our study provides important new evidence about audit teams as called for by academics and regulators.

Our study is motivated by the theory of credence goods in the auditing setting. We propose that audit committee accounting expertise should reduce information asymmetries between the auditor and the client, thereby limiting auditors' ability to over-audit and under-audit. Consistent with this notion, our results indicate that when audit committees have accounting expertise, clients (1) pay lower fees when changes in standards decrease required audit effort; (2) pay a smaller fee premium in the presence of remediated material weaknesses; and (3) have a reduced likelihood of restatement when audit market competition is high. Our findings in the under-auditing setting generally are strongest among non-Big 4 engagements, consistent with non-Big 4 auditors being less sensitive to market-wide disciplining mechanisms such as reputation, legal liability, and professional regulation. We also provide evidence that the nature of audit committee members' accounting expertise differentially impacts the committee's ability to curtail over- and under-auditing. JEL Classifications: M40; M41; M42.

In this study, we investigate the financial reporting behavior of chief financial officers (CFOs) with significant prior audit experience. Our tests indicate that, on average, CFOs who were former audit managers or partners report less aggressively than CFOs without prior audit experience. Thus, the mindset that auditors develop during their time in public accounting – which should value objective, transparent, and conservative financial reporting – appears to persist when auditors take high-level positions in industry. However, we also find that the reporting behavior of prior-auditor CFOs becomes more aggressive over time as the salience of their audit experience decays. Further, we find that audit fees are lower for clients with prior-auditor CFOs but increase as the CFOs’ time away from auditing increases. Overall, our study offers important insights regarding how audit experience is associated with the financial reporting behavior of CFOs.

In this paper, we investigate how auditors respond to shareholder activism against their clients. Our study is important because activism may be viewed by auditors as a source of increased engagement risk, thereby impacting audit outcomes. The potential relationship between shareholder activism and audit outcomes leads us to predict that activism targets will pay higher audit fees and also will be more likely to receive adverse internal control opinions (ICOs) and first‐time going concern opinions (GCOs). Our results, which support all three predictions, suggest that the public scrutiny associated with activism campaigns heightens auditors' concerns about reputational damage and litigation risk. Consistent with this notion, we find that activism targets are more likely to experience accounting‐related lawsuits. We also find that the increased likelihood of adverse ICOs documented in our baseline tests reflects higher‐quality reporting rather than increased auditor conservatism. Overall, our findings suggest that activism campaigns spur auditor diligence while also increasing the possibility of negative outcomes that may not be fully anticipated by activist investors. Reponses des auditeurs a l'activisme des actionnaires Dans cet article, nous examinons de quelle facon les auditeurs repondent a l'activisme des actionnaires a l'encontre de leurs clients. Notre etude est importante, car l'activisme peut etre percu par les auditeurs comme une source d'accroissement du risque de mission, et peut donc avoir une incidence sur les resultats d'audit. La relation possible entre l'activisme des actionnaires et les resultats d'audit nous laisse presager que les societes qui font l'objet d'un tel activisme assument des frais d'audit plus eleves et sont plus susceptibles de recevoir une opinion sur le controle interne negative et une premiere opinion sur la continuite de l'exploitation. Nos observations, qui soutiennent ces trois previsions, portent a croire que l'examen du public associe aux campagnes d'activisme accroit les preoccupations des auditeurs quant aux risques d'atteinte a la reputation et de litige. Conformement a cette notion, nous constatons que les societes ciblees par l'activisme sont plus susceptibles de faire face a des poursuites judiciaires liees a leurs activites comptables. Nous montrons egalement que la hausse de la probabilite de recevoir une opinion sur le controle interne negative documentee dans nos tests de base est attribuable a une communication d'information de meilleure qualite plutot qu'a un conservatisme accru de la part des auditeurs. Dans l'ensemble, nos observations donnent a penser que les campagnes d'activisme encouragent la diligence des auditeurs tout en augmentant la possibilite de resultats negatifs que ne peuvent pas entierement prevoir les investisseurs activistes.

This case requires students to apply accounting and ethical decision making within the context of a potential land impairment decision. Students are required to research the relevant professional literature and provide appropriate FASB codification references and IAS cites as they investigate the significant uncertainties that frequently are associated with valuation and impairment analyses. Students also are required to evaluate the ethical implications of the decisions that could be made regarding the necessity of impairment. The case provides an opportunity for students to extend their research and financial accounting abilities, to consider the consequences associated with a set of potentially reasonable accounting alternatives, and to begin to appreciate how the significant uncertainties that are present in many accounting and auditing situations require consistent technical and ethical decision making. The case could be used in Intermediate Accounting I, as well as in undergraduate and graduate Auditing or Ethics classes.

We test the relationship between the change in a firm's cost of debt and the disclosure of a material weakness in an initial Section 404 report. We find that, on average, a firm's credit spread on its publicly traded debt marginally increases if it discloses a material weakness. We also examine the impact of monitoring by credit rating agencies and/or banks on this result and find that the result is more pronounced for firms that are not monitored. Additional analysis indicates that the effect of bank monitoring appears to be the primary driver of these monitoring results. This finding is consistent with the argument that banks are effective delegated monitors for the debt market. The results of this study suggest the need for future research, particularly to test the differential effects of monitoring on the cost of debt compared to the cost of equity.

PurposeThe purpose of this paper is to investigate the relationship between auditor industry differentiation (specialization) and the underpricing of initial public offerings (IPOs). The intention is to determine whether IPO firms – particularly those in the small firm segment of the market where information asymmetry is likely to be greatest – can benefit from significantly better IPO pricing by engaging the services of differentiated auditors.Design/methodology/approachThe paper examines a broad sample of initial public offerings made between 1991 and 2000. It also conducts univariate and multivariate tests to assess the relationship between IPO underpricing and auditor industry specialization.FindingsThe paper finds that IPOs audited by Big 6 firms experience significantly less underpricing than IPOs audited by non‐Big 6 firms, particularly among small clients. It also finds an additional (and significantly larger) reduction in underpricing when the client engages an auditor that has established itself as the clear leader in its industry.Research limitations/implicationsThe results in this paper may not be generalizable to different countries. They do, however, appear to be robust in the USA throughout the ten‐year sample period.Practical implicationsThe paper shows that it may not be feasible for all clients in the small‐firm segment of the market to engage specialist auditors. However, if they can, the results suggest that they could benefit from better IPO pricing.Originality/valueThe paper combines the auditor specialization literature with the IPO underpricing literature and also documents a significant economic benefit to smaller IPO firms.

This paper examines the pricing of assurance services in secondary equity offerings (SEOs). Our empirical model extends initial public offering (IPO) fee specifications to include variables that are unique to, or more relevant for, secondary offerings. We document an inverse relationship between SEO fees and a client's ability to delay its secondary offering, suggesting that auditors do not charge as much for SEOs made by relatively mature firms. The relationship reverses, however, when the client is required to use more comprehensive types of filings (i.e., when assurance effort is higher). We also show that fees are higher when the SEO comes to market during the client's annual audit period. This finding is consistent with the shifting of year-end audit fees to SEO engagements in an effort to boost earnings for both clients and auditors (at the expense of shareholders). We cannot, however, unambiguously conclude that fee shifting exists, as the observed fee premium could be explained by other factors.

In this paper we investigate audit pricing for financial institutions. We modify the standard audit fee model for industrial companies by incorporating measures of risk and complexity that are either unique to or more relevant for banks, and that are used by bank regulatory agencies. For a sample of 277 financial institutions in fiscal 2000, we find that audit fees are higher for banks having more transactions accounts, fewer securities as a percentage of total assets, lower levels of efficiency, and higher degrees of credit risk. Higher fees also obtain for savings institutions, for banks that are more involved in acquisition activity, and for institutions that are required by regulatory agencies to maintain higher levels of risk-adjusted capital. Our model reveals that the complexities and risks deemed most important by regulatory agencies are also those that tend to be priced by audit firms. The importance of the audit process for banks is likely to intensify in the future as regulatory changes increase the importance of market discipline in controlling bank risk-taking.

This paper examines IPO audit fees to assess the use of industry specialization as a differentiation strategy by audit firms. We extend existing theory on the impact of industry specialization on audit fees by incorporating Porter's (1985) theory of competition and differentiation. We suggest that market share enables audit firms to gain competitive advantages in terms of cost and service. However, the impact of such advantages on fees depends on whether the audit firm has successfully differentiated itself from competitors within client industries. Our results indicate that as audit firm industry market share increases without a differentiation in market share, the audit fee charged for a given IPO decreases. In the context of Porter (1985), this result suggests that the client is able to bargain for a portion of the auditor's cost savings because the audit firm has not successfully differentiated itself from competitors. In contrast, we show that audit firms that possess significantly higher market shares than their industry competitors earn fee premiums, suggesting that audit firms that have successfully differentiated themselves retain a stronger bargaining position with their clients.

Changes in the provisions of the United States Banking Act of 1933 have allowed the entry of commercial banks into the initial public offering (IPO) underwriting market. In this paper, we examine the effect of commercial bank equity underwriting on the fees paid to auditors. We predict that IPO assurance fees will be higher for equity offerings underwritten by commercial banks than for offerings handled by traditional underwriters because (1) commercial banks are relatively inexperienced in bringing firms public, requiring additional assistance from accounting firms in the IPO process; (2) new entrants into the underwriting market may manage lower quality issues that require additional assurance services; and/or (3) since commercial banks have greater resources than do traditional investment banks, they are likely to be exposed to greater litigation risk, providing incentives for commercial bank underwriters to ensure that the IPO firm purchases greater assurance from the auditor. However, we expect fees to decrease if a previous lending relationship existed between the commercial bank and its client. Our findings, based on a sample of issues brought to market between 1991 and 1997, support these expectations.

Gueether and Trombley (1994) and Jennings, Simko, and Thompson (1996) document a negative association between a firm's last-in, first-out (LIFO) reserve and the market value of its equity. In this paper, we test a deferred tax explanation of this negative association. Specifically, we argue that investors, conditional on adjusting inventory to as-if first-in, first-out (FIFO), estimate a firm's future LIFO liquidation tax burden as its LIFO reserve multiplied by the appropriate corporate tax rate and include this tax-adjusted LIFO reserve in the valuation of a LIFO firm's net assets. On the basis of this argument, the tax-adjusted LIFO reserve is in effect an estimate of an off-balance-sheet deferred tax liability and, as a result, we predict a negative association between the tax-adjusted LIFO reserve and market Value of equity. We test our deferred tax explanation by estimating a valuation model in which a firm's maitet value of equity is expressed as a function of the firm's assets, liabilities, deferred tax liability, and tax-adjusted LIFO reserve; the model is estimated separately in years preceding and following the reduction of tax rates mandated by the US Tax Reform Act of 1986. Test results provide strong support for the deferred taj[ explanation of the negative association between a firm's LIFO reser/e and the market value of its equity.

We examine a sample of in-the-money convertible preferred stock calls and find that they are delayed. We find that the length of the call delay does not depend on the relation between the preferred stock dividends and the pro rata common dividends to be paid on conversion. Thus, our evidence suggests that preferred stock calls may be used for signaling purposes. In support of this, we find that only delayed calls (i.e., those with potential signaling elements) are viewed negatively by equity investors. We also show that, in responding to delayed call announcements, investors appear to react to two distinct information elements. First, price responses to delayed calls are increasingly negative the larger the cash flow disadvantage to calling. In other words, common investors respond more negatively to calls when the forced conversion results in convertible holders receiving larger dividends than were previously required. Second, both cash flow advantage and cash flow disadvantage firms experience significant downward shifts in earnings growth during post-call periods, suggesting that delayed calls are timely signals of decreasing profitability.

Qualifications to an audit report may provide the basis for an auditor's claim that the user was warned about an unusual risk. If audit qualifications highlight changes in firm risk that are material, then the announcement of a qualification should be associated with an increase in the risk of the affected firm. In this paper, we test this proposition. Our initial tests do not detect a shift in systematic risk around qualification announcements; however, subsequent analysis shows that firms announcing recurring material uncertainties have higher levels of systematic risk than firms announcing initial qualifications. Furthermore, we document a significant decrease in systematic risk for firms publicly announcing qualification withdrawals. These results are consistent with announcements of qualification withdrawals providing more timely information to capital market participants than announcements of qualification issuances, which are more likely to have been pre-empted by alternative sources of information. Our findings also indicate that unsystematic, or firm-specific, risk changes significantly around qualification and withdrawal announcement dates. Although systematic risk is of primary importance to investors, information regarding company-specific risk may assist other outside users (i.e., lenders, regulators, employees, rating agencies, etc.) in evaluating a given firm's ability to satisfy its existing contracts. In total, this paper provides evidence that may be useful to many external parties regarding the association between the material uncertainties that are highlighted in audit reports and changes in firm risk.

This study examines the extent to which audit clients successfully engage in internal control opinion shopping activities and whether audit market competition appears to facilitate those activities. Regulators have long been concerned about the impact of both audit market competition and opinion shopping on audit quality. We adopt the framework developed in Lennox (2000) to construct a proxy to measure the tendency that clients engage in internal control opinion shopping activities. Our empirical results suggest that clients are successful in shopping for clean internal control opinions. In addition, we find evidence that internal control opinion shopping occurs primarily in competitive audit markets. Finally, our results indicate that among auditor dismissal clients, opinion shopping is more likely to occur when dismissals are made relatively late during a reporting period and when audit market competition is high. Our findings have implications for the current policy debate regarding audit quality and audit market competition.

In this study, we use a survey instrument to obtain perspectives from almost 800 auditors about present-day audit workloads and the relationship between audit workloads and audit quality. Our findings indicate that auditors are working, on average, five hours per week above the threshold at which they believe audit quality begins to deteriorate and often 20 hours above this threshold at the peak of busy season. Survey respondents perceive deadlines and staffing shortages as two of the primary reasons for high workloads and further believe that high workloads result in decreased audit quality via compromised audit procedures (including taking shortcuts), impaired audit judgment (including reduced professional skepticism), and difficulty retaining staff with appropriate knowledge and skills. We also find that auditors’ job satisfaction and their views on the audit profession are impacted negatively by audit workloads, particularly when the workloads are perceived as being heavy enough to impair audit quality. Overall, our findings provide support for the PCAOB’s concern regarding excessive workloads and suggest that the primary drivers of workloads (i.e., deadlines and staffing problems) might be the actual “root cause” of workload-related audit deficiencies.

We investigate share price reactions to announcements of dividends payable in the common stock of corporations different from the issuing firm. We find that firms that declare these dividends (typically investment companies) experience positive abnormal returns upon announcement. We also find that such dividends are more likely to be declared when the shares to be distributed have peaked in value. Consistent with this finding, we document negative announcement-period abnormal returns for firms having their shares distributed. Additional tests reveal that prices respond more negatively when the information signal is strongest, when outside ownership is more dispersed, and when management is more entrenched.

Refinancing pressure may entice a very specific form of managerial misbehavior on the part of borrowers. Borrowers utilizing a greater amount of short term debt in one period may feel pressure to make their firms look as attractive as possible leading into the next period when refinancing may take place. In other words, potential refinancing pressure may lead managers to manipulate earnings. We examine the relation between changes in debt in current liabilities (short-term debt) and discretionary accruals as an indicator of the propensity to manage earnings. Our results show that (i) firms have higher discretionary accruals during periods of increasing short-term debt, (ii) firms have higher discretionary accruals prior to the initiation of bank loan agreements, and (iii) the relationship between discretionary accruals and refinancing pressure may be influenced by a firm’s credit risk.

SUMMARY: This study investigates whether auditor quality and audit committee expertise are associated with improved financial reporting timeliness as measured by the duration of a financial statement restatement's “dark period.” The restatement dark period represents the length of time between a company's discovery that it will need to restate financial data and the subsequent disclosure of the restatement's effect on earnings. For a sample of dark restatements disclosed between 2004 and 2009, we find that companies that engage Big 4 auditors have shorter dark periods than companies that do not engage Big 4 auditors. We also find that companies with more financial experts on the audit committee have shorter dark periods, but only when such financial expertise relates specifically to accounting. Finally, companies with audit committee chairs that have accounting financial expertise provide the most timely disclosures, as the dark periods for these firms are reduced by approximately 38 percent. Our results suggest that both auditor and audit committee expertise are associated with the timely disclosure of restatement details. Data Availability: All data are publicly available from sources identified in the paper.

We examine the competition among Big 4 firms for Andersen’s public clients during and after its demise in 2002. Andersen’s failure provides a quasi laboratory to investigate how audit firms compete for new clients. Our analysis focuses primarily on the acquisition by Big 4 firms of some, but not all, of Andersen’s individual offices in the United States, and the resulting impact on public clients. The United States Congress expressed concern about the failure of Andersen when it required the GAO to study the competitive nature of audit markets as part of the Sarbanes Oxley Act (GAO 2003). We build on the original GAO study by incorporating office purchases into the analysis of competition for Andersen’s public clients. We use news reports to construct a database that differentiates between Andersen offices that were effectively purchased or not purchased by the surviving Big 4 firms.1 This database enables us to explore the factors associated with Big 4 office purchases, differences in strategies used to acquire Andersen’s clients, and the impact of these different acquisition strategies on audit fees. We identify 65 Andersen offices that served public clients in 2001. Big 4 firms purchased 39 offices and three local industry practice units from large offices. Based on these data, we consider four types of Andersen client switches: (a) EARLY_SWITCHERS: clients who switched prior to the purchase of their Andersen office, or if the office was not purchased, prior to the first Andersen

In this paper we investigate the reputational penalties to managers of firms announcing earnings restatements. More specifically, we examine management turnover and the subsequent employment of displaced managers at firms announcing earnings restatements during 1997 or 1998. In contrast to prior research (Beneish 1999; Agrawal et al. 1999), which does not find increased turnover following GAAP violations or revelation of corporate fraud, we find that 60 percent of restating firms experience a turnover of at least one top manager within 24 months of the restatement compared to 35 percent among age-, size-, and industry-matched firms. Moreover, the subsequent employment prospects of the displaced managers of restatement firms are poorer than those of the displaced managers of control firms. Our results hold after controlling for firm performance, bankruptcy, and other determinants of management turnover, and suggest that both corporate boards and the external labor market impose significant penalties on managers for violating GAAP. Also, in light of resource constraints at the SEC, our findings are encouraging as they suggest that private penalties for GAAP violations are severe and may serve as partial substitutes for public enforcement of GAAP violations.

The purpose of this paper is to evaluate whether the expanded requirements of SAS No. 59 (AICPA [1988]), which requires auditors to actively evaluate and report on a client's going-concern status for the coming year, have allowed investors to make more accurate ex ante assessments of firms that eventually file for bankruptcy. We extend Chen and Church [1996] (hereafter CC), who conclude that SAS No. 34 (AICPA [19811) "subject to" going-concern opinions have information value because they reduce the surprise associated with bankruptcy announcements. We hypothesize that if SAS No. 59 has achieved what was intended, going-concern opinions issued under SAS No. 59 should further reduce investor surprise at bankruptcy announcements. While we do not believe SAS No. 59 was issued for the specific purpose of helping users to predict bankruptcy, we do suggest that the increased auditor responsibility and improved communication should provide users with information that is of relatively higher quality. This argument is based on a number of important differences between SAS No. 34 and SAS No. 59. Under SAS No. 34, the auditor's responsibility to evaluate a firm's ability to continue as a going concern was passive. Although auditors were