Client Selectivity Among Mid-Sized Auditing Firms: Evidence From The Post-Sox Audit Market Realignment

Document Type



Published in the Journal of Business and Economic Research, volume 10, issue 11, 2012. Bryant users may access this article here.


Auditor Change; Mid-sized Auditing Firms; Sarbanes-Oxley; Client-demand; Auditor-supply


The Clute Institute

Publication Source

Journal of Business and Economic Research


Considerable realignment in the audit market occurred in the wake of the Sarbanes-Oxley Act of 2002, with many clients switching from a Big 4 to a non-Big 4 auditor. We examine a sample of 212 former Big 4 clients who switched to either a mid-sized auditing firm (i.e., BDO Siedman, Crowe Horwath, Grant Thornton and McGladrey) or a small auditing firm. We consider reasons why clients may prefer a mid-sized firm rather than a small firm (called “client demand” characteristics) and reasons why auditors may be willing to accept an audit engagement (called “auditor supply” characteristics). Among client demand characteristics, we find that clients are more likely to engage a mid-sized auditing firm when the client is larger, has higher asset turnover, and has foreign operations. From an auditor supply perspective, we find that a mid-sized auditing firm is more likely to accept the client if the client is willing to pay higher audit fees and uses the auditor for non-audit services.

Higher financial leverage could be seen from either a client demand or auditor supply perspective. From a client demand perspective, higher financial leverage would make clients prefer mid-sized auditors, as these clients’ needs for financing could lead them to seek a more “brand-name” auditor to enhance their credibility with banks and other creditors. From an auditor supply perspective, auditors may prefer to avoid clients with higher leverage, which reflects financial riskiness. These financially risky clients may result in adverse reputational and/or legal costs for the auditing firm. We find that clients with higher leverage are less likely to engage a mid-sized CPA firm. These results suggest that mid-sized auditors are somewhat selective in the clients they are willing to accept.