Review of Industrial Organization (2006) 29:193–212 © Springer 2006
A Basic Quantiﬁcation of the Competitive
Implications of the Demise of Arthur Andersen
EMILIE R. FELDMAN
Harvard Business School WYSS HALL 302-A, MA 02163, Boston
Abstract. Andersen’s exit from the already-concentrated market for auditing services is shown to
have increased market concentration and audit fees. Changes in market concentration are found
to be signiﬁcantly related to changes in audit fees, suggesting that the structure-performance
hypothesis is applicable to the post-Andersen accounting industry and that the “Final Four”
accounting ﬁrms may have exercised market power in this environment. The paper concludes
with a discussion of the implications of Andersen’s exit from the market.
Key words: Arthur Andersen, accounting, audit fees, market concentration, market power,
On March 15, 2002, after months of negotiations, the Department of
Justice (“DOJ”) obtained a criminal indictment against Arthur Andersen,
LLP (“Andersen”) on the felony charge of obstructing justice in connection
with its conduct as Enron’s auditor. Three months later, a jury convicted
Andersen of that crime.
Under the Rules of Practice of the Securities and
Exchange Commission (“SEC”) (SEC, 1995), a ﬁrm with a criminal con-
viction would be barred from practicing before that agency. The convic-
tion put Andersen out of business, following a few months in which major
clients were defecting daily to the other accounting ﬁrms.
The United States Supreme Court reversed Andersen’s criminal conviction on May
31, 2005 on procedural grounds (Supreme Court, 2005) and remanded the case to the
lower courts. On November 22, 2005, the DOJ ﬁled a motion to dismiss the criminal
case against Andersen, a move that “wasn’t surprising in light of the Supreme Court
ruling and Andersen’s demise as an accounting ﬁrm” (Emshwiller, 2005).
The attrition of Andersen’s client base was so steady that the New York Post sati-
rized it in a daily feature called “Andersen Watch,” which juxtaposed a list of the day’s
defections with a picture of Paul Volcker (the Andersen-appointed head of an Indepen-
dent Oversight Board created to effect change within the ﬁrm).