The effect of Enron, Andersen, and Sarbanes‐Oxley on the US market for audit services

Purpose – The purpose of this paper is to examine the effect of the Enron scandal, Arthur Andersen's demise and the Sarbanes‐Oxley Act on audit fees. Design/methodology/approach – The paper uses empirical methodology (univariate and multivariate). Findings – Audit fees and the Big‐4 premium increased in 2002. Increase was larger for bigger and riskier clients. Evidence is also consistent with a competitive market for former Andersen clients. Research limitations/implications – Data requirements might bias the sample towards larger sized firms. Data availability limits the number of observations. Practical implications – The research findings on audit fees in post‐Enron and Arthur Andersen period reported in this paper are important for policy makers. Originality/value – It is found that the premium charged by Big 4 over non‐Big 4 has increased in 2002, and that the ability of an auditor to charge a premium is adversely affected when its reputation is tarnished. It is also reported that the frequency of voluntary switches within the Big 4 is lowest in 19 years. The audit fee model was also refined by adding two ownership variables to control for agency aspect of client firms; inside and institutional ownership.