The Effect of Enron, Andersen, and Sarbanes-Oxley on the Market for Audit Services
University of Texas-San Antonio
Temple University - Department of Accounting
Rutgers Business School - Camden
In this paper we examine the effect of Enron, Andersen, and Sarbanes-Oxley on the fees paid by clients for their audits, and on the movement of clients from one auditor to another. As a percentage of total assets the average audit fee increased from 0.092 percent in 2000, the year before the Enron scandal broke, to 0.157 percent in 2002, the year Sarbanes-Oxley was passed. We document that not only did audit fees increase in 2002, but so did the premium charged by the Big 4 audit firms. We also find that bigger and riskier clients had larger increases in their audit fees. We attribute the former to decreased competition in the market for audits of multinational corporations and the latter to increases in the premium charged to riskier clients in the new environment. We also find evidence consistent with a competitive market for former Andersen clients. That is, former Andersen clients actually pay lower audit fees in 2002 than continuing clients of the Big 4 audit firms. Finally, we also find the frequency of voluntary switches within the Big 4 the lowest in 19 years, a finding we attribute to increased sensitivity to risk on the part of auditors.
JEL Classification: M49, L84, G38
Date posted: August 9, 2004