Long-Term Trends in Audit Market Shares: Effects of Big-4 Pricing Strategies or Non-Big-4 Market Power?

• In Event: Audit Markets

Abstract

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. Two major factors contributing to this shift were (i) the enactment of the Sarbanes-Oxley Act (hereafter SOX) and (ii) the collapse of one of the major audit firms, Arthur-Andersen (AA). Starting from these events in 2002, we see a continuous increase in audit fees and a loss in market share for the BIG-4. By developing a formal model of auditor choice, we are able to differentiate between market share losses arising from differential fee increases across BIG-4 and NB-4 auditors as opposed to losses arising from more effective NB-4 competition. We then form empirical tests around these hypotheses by exploiting variations in the fee increases and market share losses of the BIG-4 across industries and across size quintiles. Our empirical results suggest that an increase in NB-4 competitiveness has played a significant role in the realignment of the market share after controlling for strategic fee increases implemented by the BIG-4.

Authors

• Bharat Sarath, Rutgers, The State University of New Jersey, Newark

• Hua Xin, Rutgers, The State University of New Jersey, Newark