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.