Fool Me Once, Shame on You; Fool Me Twice, Shame on Me : The Long-Term Impact of Arthur Andersen’s Demise on Partners’ Audit Quality

The increase in disclosure about the persons conducting audits has led to a steep rise in research examining the role that individual audit partners play in audit outcomes. Although recent evidence suggests that individual audit partners explain a substantial portion of the variation in audit quality proxies, much less is known about what determines an audit partner's quality. Psychology and behavioral economics theories hold that an individual's experiences can have enduring impacts on subsequent behavior. We examine whether auditors' direct exposure to Arthur Andersen's collapse has a long-term impact on the quality of their audits. Our evidence implies that audit partners who directly experienced Andersen's demise impose stricter monitoring of the financial reporting process evident in their clients exhibiting a lower propensity for misstatements and small profits, and paying higher audit fees. Additional analyses suggest that both higher quality auditing and client screening play a role in explaining our core results