We examine competition for Andersen’s public clients during and after its failure in 2002. This setting provides a natural experiment to examine audit market dynamics at the local level. We construct a database documenting Big4 purchases of local Andersen offices. After exploring the factors associated with office purchases, we examine the impact of office purchases on public client market share gains and changes in audit fees. We find that three Big4 firms – Deloitte, Ernst & Young, and KPMG – purchased approximately 60% of Andersen’s offices while PricewaterhouseCoopers did not purchase any. The probability that a firm purchased a specific office is greater in markets where the acquiring firm: 1) already had a presence, 2) had a lower ratio of local Andersen clients to the purchaser’s clients, and 3) had already acquired relatively more local former Andersen public clients than other firms prior to the purchase. Our fee analysis expands the United States Government Accountability Office (GAO) post-Andersen audit market study by documenting that the former Andersen clients’ change in audit fees is associated with the differences in client acquisition method.
Canadian Academic Accounting Association
Kohlbeck, M., Mayhew, B.W., Murphy, P., & Wilkins, M.S. (2008). Competition for Andersen's Clients. Contemporary Accounting Research, 25(4), 1099-1136. doi: 10.1506/car.25.4.6
Contemporary Accounting Research