An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jason D. Schloetzer
University of Pittsburgh

Abstract: I analyze an oligopoly model to predict the response of the audit market to the merger between Andersen and the remaining Big N firms and the implementation of Sarbanes-Oxley. The model predicts that the number of audits completed by the remaining Big N firms will decline after each event, creating increases in clients switching to non-Big N firms. I present evidence supporting these predictions, and document the noticeable change in the median client switching to non-Big N firms. I argue that the number of days between a client’s fiscal year end and the submission date of its annual 10-K proxies for client audit risk. After controlling for financial risk, I find that as the 10-K reporting lag increases, the likelihood of switching to a non-Big N firm increases. This suggests that when choosing between clients with similar financial risk, Big N firms do not retain clients with higher audit risk.

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