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The Effect of Fewer Big Audit Firms on Audit Fees: The Case of Arthur Andersen Collapse
Magdy Farag,
Kent State University
ABSTRACT. Based on a sample consisting of the S&P 500 firms, and using both the audit fee model and the first differential model, I investigate the effect of the reduction in number of Big Five audit firms, due to the collapse of Arthur Andersen LLP, on audit fees. I provide evidence that the increased concentration in the audit market led to a significant increase in audit fees. Furthermore, I find that this significant increase in the audit fees did not much apply on former Arthur Andersen LLP’s clients that switched to other Big Audit firms. Overall, my collective evidence is consistent with the notion that fewer audit firms may lead to a form of an oligopoly in the audit market, which consequently will reduce price competition and eventually increase audit fees.
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