Long-Term Trends in Audit Market Shares: Effects of BIG-4 Pricing Strategies or Non BIG-4 Market Power?
59 Pages Posted: 25 Feb 2014 Last revised: 21 Jan 2016
Date Written: January 14, 2014
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 quintiles to examine changes in pricing strategies and market shares of BIG-4 and NB-4 auditors. In particular we examine whether the market share 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 share for audit services across BIG-4 and NB-4 auditors following the enactment of SOX and the collapse of AA.
Keywords: BIG-4, Audit Fees, Market Share, Oligopolistic Competition
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