An Analysis of Big 4 Pricing and Firm Size: The Differential Impact of Demand and Supply Shocks on Large and Small Clients

Posted: 10 Feb 2017 Last revised: 28 Mar 2017

See all articles by Fatima Alali

Fatima Alali

California State University, Fullerton

Randal J. Elder

Syracuse University

Jian Zhou

University of Hawaii at Manoa

Date Written: February 9, 2016


We investigate Big 4 pricing over the period 2000 to 2010. We classify the data into five periods: 2000-2001 as the pre-SOX period, 2002-2003 as the SOX period, 2004-2006 as the AS2 period, 2007 as the AS5 period, and 2008-2010 as the Great Recession period. These shocks to the audit market associated with these changes in auditing regulations and the economic environment have differential impacts on large clients and small clients.

The percentage of small clients using Big 4 auditors dropped significantly over these shocks while the percentage of large clients using Big 4 auditors experienced a large drop only from the SOX period to the AS2 period. We find that Big 4 pricing increases significantly from the pre-SOX period to the SOX period, and continues to increase significantly in the AS2 period. Big 4 pricing experienced a significant decline in the AS5 period and declined insignificantly in the Great Recession period. Big 4 small firm pricing decreased significantly in the AS2 period compared to the SOX period and in the Great Recession period compared to the AS5 period. We find that the Big 4 pricing for small clients is contingent on the nature of competition. The Big 4 charge small firms higher prices in the SOX period, AS5 period and Great Recession when competition is lower. Our paper provides a unique contribution as a comprehensive analysis of Big 4 pricing and Big 4 small firm pricing.

Keywords: Big 4 pricing, small firms, Sarbanes-Oxley Act, PCAOB AS2, PCAOB AS5, Great Recession

JEL Classification: G38

Suggested Citation

Alali, Fatima A and Elder, Randy and Zhou, Jian, An Analysis of Big 4 Pricing and Firm Size: The Differential Impact of Demand and Supply Shocks on Large and Small Clients (February 9, 2016). Journal of Accounting, Auditing and Finance, Forthcoming, Available at SSRN: or

Fatima A Alali (Contact Author)

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

Randy Elder

Syracuse University ( email )

900 S. Crouse Avenue
School of Management Department of Accounting
Syracuse, NY 13244
United States
315-443-3359 (Phone)
315-443-5457 (Fax)

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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