Effect of Auditor Concentration on Audit Pricing and Quality: International Evidence from Arthur Andersen’s Demise

Abstract

Using samples from twelve non-U.S. countries, we find that subsequent to Andersen’s demise, audit fees charged by the succeeding Big-4 auditors were higher for ex-Andersen clients than for existing clients and non-Andersen switch-ins. We show that this result is inconsistent with either rent extraction or quality impairment in the face of greater auditor concentration. The increase in audit fees is not different for early switchers and late switchers from Andersen, which is inconsistent with the remaining Big-4 auditors exploiting the weak bargaining power of late-switching clients. Further, we find that Andersen’s clients did not have poorer earnings quality compared to other Big-4 auditors’ clients in the pre-demise period but had better quality in the post-demise period. Together, these results point to increased auditor conservatism in the face of higher perceived risk for ex-Andersen clients. These findings allay regulators’ concerns about auditor concentration by finding no adverse effects even in jurisdictions where the legal and extra-legal institutions are not as strong as in the U.S.

Keywords: Audit pricing and quality, Auditor concentration, Arthur Andersen, Legal and Extra-legal institutions

JEL Classification: G15, L11, M41, M49