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    The Impact of the Big 4 Consolidation on Audit Market Share...
    research summary posted October 29, 2013 by Jennifer M Mueller-Phillips, last edited October 29, 2013, tagged 01.0 Standard Setting, 01.05 Impact of SOX 
    The Impact of the Big 4 Consolidation on Audit Market Share Equality
    Practical Implications:

    The findings of this study indicate that the overall audit market share between the remaining 4 firms has actually become more equalized after consolidation than when there were 5 firms. Firm leaders concerned with addressing competition over clients in the auditing field could benefit from understanding the effects of Andersen’s demise and the passing of SOX that resulted in a more equal market share among the firms as well as a more constrained variety of choices for audit clients.

    For more information on this study, please contact Kimberly Dunn.


    Dunn, K., M. Kohlbeck, and B.W. Mayhew. 2011. The impact of the big 4 consolidation on audit market share equality 30 (1): 49-73.

    auditing; market equality; competition
    Purpose of the Study:

    The year 2002 resulted in the downfall of one of the largest accounting firms in the nation as well as the passing of the Sarbanes-Oxley Act (SOX). The demise of Arthur Andersen, in turn, led to the transformation of the Big 5 firms into the Big 4 firms. The effects of this particular consolidation are important as this did not arise from a merger, where clients tend to follow their newly merged firm, but from the dispersing of Arthur Andersen’s clients to the remaining four firms. This study examines how this consolidation affected audit market share equality at the national industry level, the city level, and the city-industry level. The authors aim to address three main issues:

    • The specific concern over audit firm concentration expressed by the U.S. Congress and directed to the General Accounting Office as part of SOX.
    • Consider whether consolidation impacts how equally divided market shares are among leading firms before and after consolidation
    • Examine the Big 4 consolidation in light of the fact that it did not result from a merger, unlike previous consolidations, which makes the impact on market equality less easily observable.

    The consolidation from 5 to only 4 major accounting firms has possible implications regarding both market share and competition among the remaining firms.

    Design/Method/ Approach:

    The data for this study is all publicly available and was collected prior to 2011. The authors studied a sample of observations from 2001 to 2007 in order to collect information from immediately before the extinction of Arthur Andersen and the passing of (SOX) as well as data from more recent years in order to give the market time to settle and reach equilibrium.

    • Although, overall concentration increases, the Big 4 have more equal market shares than the Big 5 had prior to consolidation at both the national-industry level and the city-industry level. Evidence also indicated more equality at the city level.
    • The largest clients in each market could have constrained choices in an auditor as is evidenced by the increased likelihood that larger clients will share the same auditor. This commonality exists at both the industry and city-industry levels.
    • Firms that had a relatively low market share (defined as less than 15%) gained a market share relative to firms with high market shares (defined as greater than 25%)  partly through Andersen’s clients
    • The findings indicate that market equality is driven by market factors unrelated to the largest clients in each market.
    • The authors believe that the increase in market share equality may explain why there has been inconsistent evidence of an association between market concentration and competition after the consolidation, and have found that there was little impact of the Big 4 consolidation on competition.
    Standard Setting
    Impact of SOX