The Impact of Product Differentiation on the Collapse of Arthur Andersen

Abstract

This study investigates industry specialization during the demise of Arthur Andersen after the Enron scandal. While the literature on industry specialization has centered mainly on the auditing firm’s ability to generate fee premiums and increase audit quality, this paper argues that industry specialization is a method of product differentiation that allows firms to be less imitable and therefore, replaceable. Using multinomial logistic regression from a sample of Fortune 500 firms, I find that Arthur Andersen was not fully differentiated with respect to industry specialization when compared with two of their competitors: Deloitte & Touche and KPMG.