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Examination of Audit Fee Premiums and Auditor Switching Pre and Post the Demise of Arthur Andersen and the Enactment of Sarbanes-Oxley Act
Joanna L. Y. Ho,
University of California Irvine
Jiuzhou Wang, Norwegian School of Economics and Business Administration
ABSTRACT. This study uses the treatment effects model and find that before the demise of Arthur Andersen and the passage of SOX, there were no audit fee premiums but that there was a reverse trend afterward. Furthermore, in our three-tier classification of auditors, our models show a selectivity bias between Big N and second-tier firms but no selectivity bias between second- and third-tier audit firms. In addition, we find that while Big 4 auditors do not charge fee premiums over second-tier auditors, second-tier auditors charge audit fee premiums over third-tier auditors. We identify a low-balling effect in 2002 but extra fees charged to downward switching clients afterwards. Risk can only play limited role to explain the extra fees.
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