Differentiating between Arthur Andersen and the Surviving Big Four on the Basis of Auditor Quality: An Empirical Investigation of the Decision to Criminally Prosecute Arthur Andersen

Criminal prosecution of financial reporting-related corporate misconduct is generally acknowledged to be sometimes warranted. The decision to seek an indictment of Arthur Andersen remains controversial, however. Eisenberg and Macey (2004) posit that because the resulting increased concentration (from the Big Five to the Big Four) in the large public company auditing services market was detrimental to consumers of auditing services, criminal prosecution of Arthur Andersen can only be justified if empirical evidence is provided that indicates that Arthur Andersen was a lower quality auditor than the surviving Big Four. In my analysis of 1125 auditees of their litigation commenced 1996 through 2002, I find empirical evidence that the auditor quality of Arthur Andersen was lower than that of the surviving Big Four CPA firms. This finding suggests that there was justification for the exercise of the prosecutorial discretion of the United States Department of Justice in seeking an indictment of Arthur Andersen.