NCPA - National Center for Policy Analysis

Investors Eventually Ceased Distinguishing Between Audit Firms

July 25, 2002

Have investors bought the "few bad apples" theory when it comes to corporate accounting? A group of researchers at Princeton University compared how the shares of Arthur Andersen corporate clients fared compared to those of corporations audited by their competitors.

  • They found that shares of Andersen clients initially fared about 5 percentage points worse than those served by other accounting firms.
  • But the differences began to evaporate in April of this year and had disappeared entirely by the end of June.
  • This suggests that investors have not lost comparatively more faith in companies audited by Andersen.

Frank Vannerson, chairman of the Mount Lucas Management Corp., thinks there is little chance Andersen was "more aggressive than the others in condoning corner-cutting schemes. Probably every non-Andersen firm in the S&P has been quietly purging their income statements of 'tainted' earnings." This process may be responsible for their relatively weaker returns, compared with Andersen's clients since April.

Rather than attributing the lack of trust to "bad apples," Vannerson prefers an analogy to a "flu epidemic -- sort of a general decline in community ethical health."

Source: Alan B. Krueger (Princeton University), "Economic Scene: Accounting for Bad Apples: Investors in the Stock Market Render their Verdicts," New York Times, July 25, 2002.


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