Title

Barriers to Entry to the Big Firm Audit Market: Evidence From Market Reaction to Switches to Second Tier Audit Firms in the Post-Sox Period

Document Type

Article

Comments

Published in Research in Accounting Regulation, volume 24 issue 1, 2012. Bryant users may access this article here.

Publication Source

Research in Accounting Regulation

Abstract

The US Government Accountability Office (GAO) studied concentration in the audit market and found that the Big 4 firms continue to dominate the market for clients with revenue of more than $500 million while non-Big 4 firms have gained market share among clients with revenue of $500 million or less (GAO, 2008). The US Treasury Advisory Committee on the Auditing Profession has expressed concern about barriers to entry that might prevent a non-Big 4 firm from increasing its market share among large publicly-traded clients (Advisory Committee, 2008). One of these barriers may be the potential cost to shareholders if the stock market reacts negatively to the appointment of a non-Big 4 auditor (GAO, 2003). We examine whether the stock market reacts negatively when clients switch from a Big 4 to a non-Big 4, because a negative reaction might make such switching less likely to occur. We find that the market does not react more negatively when clients move from a Big 4 to a Second Tier auditing firm than when clients move from a Big 4 to another Big 4 firm. Our results suggest that a negative market reaction may not represent a significant barrier to entry among Second Tier auditing firms.