Did Houston clients of Arthur Andersen recognize publicly available bad news in a timely fashion?

Despite the allegations of audit failure and the enormous publicity surrounding Arthur Andersen’s indictment, there is no systematic empirical evidence on characteristics of accounting information of clients of Arthur Andersen vis-à-vis other Big Six auditors. I examine whether earnings of Andersen’s Houston-based clients are timely in reporting bad news about future cash flows. I find that relative to a control group consisting of Houston-based clients audited by other Big Six auditors, earnings of Andersen clients are less timely in reporting bad news. Further, it appears that operating accruals of clients of Andersen are less effective in accelerating the timely recognition of bad news than operating accruals of non-Andersen clients. The findings suggest that the clients of Andersen’s Houston office engaged in aggressive accounting practices, including delayed recognition of publicly available bad news.