Does ex-Andersen Client Possess Higher Audit and Litigation Risk? Examination of Conservatism Level on Financial Reporting

This study examines whether former Andersen clients report more conservative earnings compared to other Big4 clients in the immediate year after an audit switch. In this study, we hypothesize that successor auditors would demand for more conservative reporting as they perceived former Anderson clients has unique audit and litigation risks. We measure conservative reporting based on the asymmetric recognition speed of good news and bad news on earnings. Our results conclude that successor auditors demand for more conservative financial reporting when auditing former Andersen client, hence contributing new evidence from an emerging market.