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

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.

The paper uses empirical methodology (univariate and multivariate).

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.

Data requirements might bias the sample towards larger sized firms. Data availability limits the number of observations.

The research findings on audit fees in post‐Enron and Arthur Andersen period reported in this paper are important for policy makers.

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.