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    Competition for Andersen's Clients (article and...
    research summary posted May 7, 2012 by The Auditing Section, last edited May 25, 2012, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.04 Predecessor Auditor Factors 
    Competition for Andersen's Clients (article and discussion)
    Practical Implications:

    Audit firms may find this study interesting because it contributes to an understanding of the competitive nature of the U.S. audit market among the remaining Big Four firms.  Additionally, this study appears to have implications for audit firms operating in a market where a major accounting firm either leaves the market or dissolves.  Specifically, the results imply that a potential growth strategy for firms remaining in such markets may be to purchase the practices of such firms, where possible.  Further, this study appears to have implications for portfolio management related to small clients and large clients, since the audit fees for these firms behaved differently following the demise of Andersen. 

    Additionally, the results suggest that the decreasing number of Big Four audit firms may be detrimental to competitive forces in the audit market, which is of importance to audit market regulators in the U.S. and globally. Given that the dissolution of an audit firm is a very rare event, this study provides unique empirical evidence on the consequences of such a dissolution. 

    In their discussion of the study, Ramnath and Weber (2008) raise concerns related to what a purchase of an Andersen office really means and how this definition may differ across markets.  They also note that a more appropriate level to examine these issues would be the partner level (e.g. clients may have chosen to remain with their Andersen partner at their new firm).  


    Kohlbeck, M., B. W. Mayhew, P. Murphy, and M. S. Wilkins. 2008. Competition for Andersen's Clients. Contemporary Accounting Research 25 (4): 1099-1136.

    Ramnath, S. and J.P. Weber. Discussion of “Competition for Andersen’s Clients”. Contemporary Accounting Research 25 (4): 1137-1146.

    auditor selection, auditor changes, Arthur Andersen, audit market competition
    Purpose of the Study:

    The authors study the competition for Andersen’s clients, with the following objectives:  

    • To investigate the competition for audit clients among the remaining Big 4 audit firms and the various approaches taken by the firms (e.g. purchasing entire offices versus targeting specific clients).
    • To investigate the association between the level of competition and audit fee changes, and whether client size affects this competition.
    • To provide evidence related to the GAO's concern that large clients have relatively few auditor choices after Andersen's demise.
    Design/Method/ Approach:

    The sample is comprised of 4,754 audit clients including 674 former Andersen clients from 65 Andersen offices, 39 of which were purchased by other Big 4 firms. Four types of Andersen client switches are considered: early switchers, clients who were part of a practice group purchased by another audit firm and stayed with that new firm, clients that switched auditors after the audit practice was purchased, and clients that were part of an Andersen practice office that was not purchased. The office purchase data was collected by examining press releases and articles to identify Andersen office purchases by other audit firms. This data was validated, when possible, by comparing it to the Public Accounting Report analysis of Andersen office purchases.  The authors use this data to examine audit fee changes and make inferences about the implications of reduced competition in the market for audit services.

    • An Andersen office purchase by another audit firm reduced competition among the Big Four within a local market, resulting in increased market power by the remaining audit firms.
    • Larger clients that face limited options when seeking a new auditor did not receive fee discounts, whereas smaller clients with more audit firm options to choose from did receive fee discounts, indicating that competition for the smaller clients affected audit pricing.
    • Clients that continued with an office purchased by another audit firm did not receive fees discounts, while clients who sought a new auditor rather than remain with the purchasing firm paid higher fees. Finally, in markets where the Andersen office was not purchased, clients received fee discounts from their new auditor.
    • Firms that chose to purchase an Andersen practice office were more likely to have a presence in the local market before the purchase, were similar in size to the Andersen office, and had already acquired a significant number of early Andersen switching clients. Offices that were purchased earlier retained a higher percentage of clients compared to offices that were purchased in later periods.
    • Purchasing offices increased the number of clients gained relatively equally across all client size levels.
    Client Acceptance and Continuance
    Audit fee decisions, Predecessor Auditor Factors
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