Auditor Conservatism after Enron

TLDR

Corporate scandals and the Sarbanes‑Oxley Act of 2002 prompted heightened scrutiny of audit quality, leading to increased going‑concern opinions and a perception that auditors act more conservatively when the profession is in the headlines. This study replicates and extends prior work to assess whether the surge in audit conservatism persists or wanes over time. We analyze audit opinions issued within one year of bankruptcy filings for 565 firms from 2000 to 2008. Going‑concern modifications rose sharply in 2002–2003 relative to 2000–2001 but subsequently fell, returning to pre‑Enron levels.

Abstract

SUMMARY: Corporate scandals and the resulting passage of the Sarbanes-Oxley Act (SOX) in 2002 significantly affected the auditing profession. The quality of financial statement audits was called into questioned and the media and regulators held audit firms responsible. Several studies found evidence of an increase in the issuance of going-concern opinions after the passage of SOX relative to earlier time periods (Geiger et al. 2005; Nogler 2008; Myers et al. 2008). Auditors, it appears, behave more conservatively when the profession is in the headlines. We replicate and extend this research to determine whether the heightened conservatism continues or whether it fades as time passes. We examine audit opinions issued 12 months or less prior to a bankruptcy filing for 565 companies from 2000–2008. Our findings indicate that while the proportion of going-concern modifications increases sharply in 2002–2003 compared to 2000–2001, it declines in the periods that follow, ultimately returning to its pre-Enron level.