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    Damaged Auditor Reputation and Analysts' Forecast...
    research summary posted June 7, 2014 by Jennifer M Mueller-Phillips, last edited March 3, 2015, tagged 03.0 Auditor Selection and Auditor Changes, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers 
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    Title:
    Damaged Auditor Reputation and Analysts' Forecast Revision Frequency
    Practical Implications:

    The results of this study are consistent with the idea that auditor reputation has an effect on analysts’ forecasts. The authors specifically examine on the collapse of Andersen, an event that was unprecedented in terms of its scope and scale. By focusing on analysts’ forecasts for this time period, audit quality concerns are the most plausible explanation for the results produced. The evidence found in this study extends upon prior research and contributes to the research on forecast revision frequency and forecast properties, as well as on the collapse of Andersen.

    Citation:

    Cahan, S. F., P. K. Chaney, D. C. Jeter, and Wei Zhang. 2013. Damaged Auditor Reputation and Analysts’ Forecast Revision Frequency. Auditing 32 (1).

    Keywords:
    analysts’ forecast revisions; Andersen; audit quality; auditor reputation; financial analysts
    Purpose of the Study:

    This study examines the reaction of financial analysts to the events associated with the collapse of Enron and Arthur Andersen. Analysts’ forecasts have often attracted significant interest in the accounting literature, but only recently have researchers begun to examine how audit quality may affect these forecasts. In this study, the authors attempt to determine whether news that damages an auditor’s reputation affects analysts’ forecast revision frequency for clients of that auditor, as well as the properties of subsequent forecasts. To test their hypotheses, the auditors specifically examine the events that surrounded the collapse of Enron and Arthur Andersen during the early 2000s. 

    Design/Method/ Approach:

    The authors examine the revisions of current quarter earnings forecasts for Andersen clients and matched sample of Big 4 clients. They used data from all Andersen and Big 4 client-period observations during the Enron period in which the client is covered by at least one analyst and where there is at least one revision. The Enron period is defined as the period from October 16, 2001 to June 30, 2002. Data was also collected from the “pre-Enron period” defined as October, 16, 2000 to June 30, 2001. All data analyzed was pulled from Compustat, I/B/E/S, and CRSP. This data was analyzed to determine how the Andersen-Enron events affected the forecast revision activity and forecast properties of financial analysts. 

    Findings:
    • Analysts revised their forecasts downward to a greater extent for Andersen clients than for the Big 4 clients during the Enron period. 
    • There is an abnormal increase in the forecast errors and forecast dispersion of Andersen clients relative to the control firms. 
    • Earnings response coefficients (ERCs) decreased for Andersen clients as the number of downward revisions increased, suggesting that the damage to Andersen’s reputation affected the market’s responsiveness to earnings for some clients. 
    • While evidence of a faster walk-down for Andersen clients exists, the results of this study indicate that affiliated analysts were slower to issue downward forecasts, consistent with affiliated analysts having less independence. 
    Category:
    Auditor Selection and Auditor Changes
    Sub-category:
    Dismissal Decisions – impact of restatements - disagreements - fees - mergers etc
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