“A string of scandals and investigations involving aggressive accounting practices has shaken confidence in corporate America and helped cause the stock market to sink to new lows despite a recovering economy,” writes Alan Krueger in today’s New York Times.

“If just a few bad apples are behind these scandals, as President Bush has suggested, his administration has surely implied that Arthur Andersen, the beleaguered accounting firm, is one of them. With unusual speed, the Justice Department sought an indictment of Andersen in March. In addition, the General Services Administration suspended Andersen from conducting new business with the federal government. In June, Andersen became the first major accounting firm to be convicted of a criminal charge — obstructing justice for shredding documents related to the Enron investigation.”

“Andersen had certified the books for Enron as well as for WorldCom, Global Crossing, Sunbeam and Waste Management, companies involved in some of the largest recent financial scandals. Andersen was also the auditor for Halliburton and Harken Energy.”

“To much of the public, the once-venerable Arthur Andersen has become synonymous with distrust in accounting. The comedian Jay Leno joked of a new cooking show, ‘Cooking the Books With Arthur Andersen’ .”

“But investors in this bear market have eventually come to devalue companies that did not use Andersen as their auditor as much as they devalued Andersen’s clients.”

“To gauge how far investors’ lack of trust extends beyond Andersen, one can compare the stock market performance of companies audited by Andersen with those audited by the other major accounting firms.”

“After initially faring worse following disclosures concerning Enron’s collapse and Andersen’s indictment, the market value of companies that had been audited by Andersen fared about the same as those that were audited by rival accounting firms by the second quarter of 2002.”

“Specifically, the auditor of each company listed in the Standard & Poor’s index of 500 stocks was identified as of November 2001. Two stock portfolios were then constructed: one consisting of the 80 companies (excluding Enron and WorldCom) that were audited by Arthur Andersen and another consisting of the balance of companies in the S.& P. 500, which were audited by other accounting firms.”

“The average cumulative stock market return for each group of companies — adjusted to balance differences in the industry mix — was tracked from Oct. 1, 2001, until last week. A report on these results that Kenneth Fortson and Alexandre Mas, two Princeton graduate students, and I prepared is online at www.irs.princeton.edu.”

“Companies in the S.& P. 500 audited by Andersen fared about as well as those audited by another accounting firm during October 2001, before news of the shredding of Enron documents became public.”

“From the end of October to early January, stocks of Andersen’s clients performed about 5 percentage points worse than those of rival firms, on average. The gap narrowed briefly in late February but opened up again in early March, just before Andersen was indicted.”