Long term trends in Auditor Choice

Abstract

The division of the market for audit services across the Big-4 (KPMG, PWC, D&T, and E&Y) and non-Big-4 (NB-4) auditors reflects both demand side effects (perceptions of higher Big-4 quality) and supply side effects (the difference in fees across these two auditor types). Using empirical evidence from long-term changes in Big-4 market shares over the period 2001-2015, we demonstrate a counter-intuitive result that a larger increase of audit fees by Big-4 auditors relative to NB-4 auditors results in a lower likelihood of switching to an NB-4 auditor. By analyzing switching behavior across different industries and client firm’s asset quintiles, and by separating switches into resignations (auditor initiated or supply-side effects) as opposed to dismissal (client initiated or demand-side effects) we provide insights into the effects of different economic causes on the choice of a Big-4 auditor by client firms.