Client Consulting Opportunities and the Reemergence of Big 4 Consulting Practices: Implications for the Audit Market

• In Event: Audit Markets 2

Abstract

Regulators have expressed concern that revenues from consulting service lines have again become too much of a focus for the Big 4 accounting firms. Since SOX prohibits the provision of many types of non-audit services by auditors to audit clients, accounting firms and many of their clients must likely choose between an auditor-client and a consultant-client relationship. We use a machine learning technique to develop a measure capturing the level of consulting needs of a client (i.e., “consulting opportunities”). We validate our measure using a series of tests and then use it to investigate the ramifications of this shift in focus. We predict and find that our measure relates positively to auditor-client realignment decisions and negatively to Big 4 auditor selection. We also show that auditor turnover rate increases and Big 4 market share decreases faster in markets with more consulting opportunities. Together, our results suggest that the regulatory decision to limit the provision of consulting services to audit clients may have inadvertently provided a mechanism to reduce Big 4 audit market share.

Authors

• Elizabeth Cowle, University of Arkansas-Fayetteville

• Tyler Kleppe, University of Arkansas

• James Robert Moon, Georgia Institute of Technology

• Jonathan Shipman, University of Arkansas-Fayetteville