Examination of Audit Fee Premiums and Auditor Switching Pre and Post the Demise of Arthur Andersen and the Enactment of Sarbanes-Oxley Act

Posted: 27 Mar 2007

See all articles by Joanna L.Y. Ho

Joanna L.Y. Ho

University of California, Irvine - Accounting Area

Jiuzhou Wang

Norwegian School of Economics and Business Administration

Date Written: January 14, 2007

Abstract

In light of the dramatically changing audit environment, we re-examine audit fee premiums and the effect of auditor switching on audit fees along the timeline from 2000 to 2005. Using the treatment effects model, we find that before the demise of Andersen and the passage of SOX, there were no audit fee premiums but that there was a reverse trend afterward. Furthermore, we classify the audit firms into three segments: Big N, second-tier (Grant Thornton and BDO Seidman), and third-tier (others). Our findings show a selectivity bias between Big N and second-tier firms but no selectivity bias between second- and third-tier audit firms. In addition, we find that while Big 4 auditors do not charge fee premiums over second-tier auditors, second-tier auditors charge audit fee premiums over third-tier auditors. Consistent with prior studies, our results show a low-balling effect in 2002, but afterwards audit firms charge extra fees to the clients downward switching from Big 4 to non-Big 4 audit firms. While risk can partly explain extra fees charged to the downward switching clients in 2004, it cannot explain this phenomenon in other years.

Keywords: Audit fee premium, Selectivity bias, Treatment effects model, Auditor switches, Three tiers of auditors

JEL Classification: M49, L84, G38

Suggested Citation

Ho, Joanna L.Y. and Wang, Jiuzhou, Examination of Audit Fee Premiums and Auditor Switching Pre and Post the Demise of Arthur Andersen and the Enactment of Sarbanes-Oxley Act (January 14, 2007). Available at SSRN: https://ssrn.com/abstract=975122

Joanna L.Y. Ho

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States
949-824-4041 (Phone)
949-725-2833 (Fax)

Jiuzhou Wang (Contact Author)

Norwegian School of Economics and Business Administration ( email )

Helleveien 30
Bergen, N-5045
Norway

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