After Enron: An Empirical Examination on Earnings Conservatism in Malaysia

Abstract

The failure of ENRON and subsequent demise of Arthur Andersen hasrenewed interest in earnings and audit research. This study examinesthe impact of ENRON debacle on earnings conservatism in Malaysia. Wehypothesised that in the period after ENRON, the auditors and managersof the firms have incentives to report more conservatively to avoid riskof litigation and to protect reputation capital. Based on a sample of 1043firm-years over the period of 2001 and 2002, we find that, on average,firms do report more conservatively in 2002. In addition, evidencesuggests that former Andersen clients report more conservatively in 2002relatively to non-Andersen clients. Further, we document similar resultsfor firms switching to from another Big 4 to another Big 4 auditing firmin 2002. Finally, we discover firms that did not switch in 2002 do reportmore conservatively in 2002. We conclude that the ENRON debacle havea profound impact on firms to report more timely earnings