Big auditors more expensive than small ones

The four biggest auditing firms in the world charge more for their services than other firms. Research from NHH shows that auditing firms in the USA raised their fees by 56 percent in 2004 as a result of implementation of the Sarbanes Oxley law.

26.11.2007 - Kristian T. Marthinsen

As part of his doctor's thesis, Essays on Audit Pricing, the NHH doctor's degree candidate Jiuzhou Wang studied the differences in fees between the four big auditing firms, Deloitte, PwC, Ernst&Young and KPMG, and other auditing firms in Norway and the USA

"If you look at the yearly increases in fees for the big four firms in the USA, these were 15, 56 and 17 percent in 2003, 2004 and 2005 respectively. The major increases in 2004 resulted from implementation of section 404 of the Sarbanes Oxley law.

Collapse in the auditing market
The collapse of Arthur Andresen in the wake of the Enron scandal in 2002 saw the five biggest auditing firms in the world reduced to four. That same year the Sarbanes Oxley law was passed in the USA as a consequence of the many scandals in the American finance market. This law imposes stricter requirements on companies and auditors in terms of auditing financial reports.

Wang has studied the effects of these events in the USA. He has taken a closer look at the previous research in order to find out how these scandals affected the price level in general, and what kind of effects these dramatic changes have had on the market for auditing services in the USA.

Demanded introductory fees
Another effect of the upheavals has been increased pressure on the four auditing firms that are left. Following the collapse of Arthur Anderson, the least attractive customers, who had previously used one of the biggest auditing firms, were forced to change over to other auditing firms. This involved moving down the hierarchy of auditing firms, and this created an opportunity for the next biggest to move up into the top club.

The increased demand for auditors who are able to handle high risks and complexity has also had the effect of forcing up prices charged by small firms.

"This is new knowledge. Previously a lot of people had argued that auditing firms would reduce their prices in order to attract new clients, but I actually found that they demanded "introductory fees" for new clients, so in reality the price goes up," explains Wang.

The recent study shows that when firms switch from a large auditing firm to a small one, the small auditors charge their new clients an average about 40 percent more than they charge their incumbent clients from 2003 to 2005.

New knowledge
Wang has found several changes in the auditing market following a number of major upheavals in the USA in 2002. Contrary to previous expectations, this difference between small and large auditing firms was also found in Norway.

Previous research into Norwegian prices did not find that the biggest auditing firms charged more than others. However, Wang's dissertation shows that these differences also exist in Norway.

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About NHH
Frøystein Gjesdal, a professor at the Institutt for rekneskap, revisjon og rettsvitenskap [institute of accountancy, auditing and law], and Øyvind Anti Nilsen of the Institutt for samfunnsøkonomi [the department of economics] were Wang's supervisors at the NHH. The external supervisor was Joanna Ho at the University of California, Irvine.

Jiuzhou Wang defended his doctoral thesis at the NHH on Friday 9th November.