The effect of Enron, Andersen, and Sarbanes‐Oxley on the US market for audit services

The effect of Enron, Andersen, and Sarbanes‐Oxley on the US market for audit services Purpose – The purpose of this paper is to examine the effect of the Enron scandal, Arthur Andersen's demise and the Sarbanes‐Oxley Act on audit fees. Design/methodology/approach – The paper uses empirical methodology (univariate and multivariate). Findings – Audit fees and the Big‐4 premium increased in 2002. Increase was larger for bigger and riskier clients. Evidence is also consistent with a competitive market for former Andersen clients. Research limitations/implications – Data requirements might bias the sample towards larger sized firms. Data availability limits the number of observations. Practical implications – The research findings on audit fees in post‐Enron and Arthur Andersen period reported in this paper are important for policy makers. Originality/value – It is found that the premium charged by Big 4 over non‐Big 4 has increased in 2002, and that the ability of an auditor to charge a premium is adversely affected when its reputation is tarnished. It is also reported that the frequency of voluntary switches within the Big 4 is lowest in 19 years. The audit fee model was also refined by adding two ownership variables to control for agency aspect of client firms; inside and institutional ownership. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting Research Journal Emerald Publishing

The effect of Enron, Andersen, and Sarbanes‐Oxley on the US market for audit services

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Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
1030-9616
DOI
10.1108/10309610910975306
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to examine the effect of the Enron scandal, Arthur Andersen's demise and the Sarbanes‐Oxley Act on audit fees. Design/methodology/approach – The paper uses empirical methodology (univariate and multivariate). Findings – Audit fees and the Big‐4 premium increased in 2002. Increase was larger for bigger and riskier clients. Evidence is also consistent with a competitive market for former Andersen clients. Research limitations/implications – Data requirements might bias the sample towards larger sized firms. Data availability limits the number of observations. Practical implications – The research findings on audit fees in post‐Enron and Arthur Andersen period reported in this paper are important for policy makers. Originality/value – It is found that the premium charged by Big 4 over non‐Big 4 has increased in 2002, and that the ability of an auditor to charge a premium is adversely affected when its reputation is tarnished. It is also reported that the frequency of voluntary switches within the Big 4 is lowest in 19 years. The audit fee model was also refined by adding two ownership variables to control for agency aspect of client firms; inside and institutional ownership.

Journal

Accounting Research JournalEmerald Publishing

Published: Jul 19, 2009

Keywords: United States of America; Auditor's fees; Legislation; Auditing standards

References

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