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

See all articles by Hua Christine Xin

Hua Christine Xin

University of Louisville

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Date Written: January 14, 2014

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 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

Suggested Citation

Xin, Hua Christine and Sarath, Bharat Sarrukai, Long-Term Trends in Audit Market Shares: Effects of BIG-4 Pricing Strategies or Non BIG-4 Market Power? (January 14, 2014). 2015 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=1985689 or http://dx.doi.org/10.2139/ssrn.1985689

Hua Christine Xin (Contact Author)

University of Louisville ( email )

School of Accountancy #137
College of Business
Louisville, KY Kentucky 40292
United States
(502)852-4816 (Phone)

HOME PAGE: http://business.louisville.edu/faculty-and-staff-directory/acct/

Bharat Sarrukai Sarath

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

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