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We analyze changes in audit fees and market shares of the BIG-4 audit firms (KPMG, PWC, D&T, E&Y) as compared with those of NB-4 (Non-Big 4) auditors in the period 2000-2011. Both relative fees and relative market shares (compared across BIG-4 and NB-4) auditors changed radically over this period due to the enactment of the Sarbanes-Oxley Act (SOX). In addition, one of the major audit firms, Arthur-Andersen (AA) was driven out of business. We exploit variations in the effects of these two events across industries and across size deciles to examine changes in pricing strategies and market shares of BIG-4 and NB-4 auditors. In particular we examine whether the market changes have been driven primarily by the BIG-4 deterring clients through pricing strategies (which we characterize as ‘cherry picking’) or through more effective competition by NB-4 auditors (which we characterize as NB-4 market power). Our empirical results suggest that both these factors have played a significant role in the realignment of the market for audit services across BIG-4 and NB-4 auditors following the enactment of SOX and the collapse of AA.
Hua Xin, Rutgers, The State University of New Jersey, Newark
Bharat Sarath, Rutgers, The State University of New Jersey, Newark