CBR Briefing #39

• Arthur Andersen’s dissolution following the Enron scandal of the early 2000s reduced the number of large global accounting firms from five to four. Since then, Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers have dominated the industry. A sudden exit by one of these Big Four could cost US clients of the disappearing firm $1.4 billion–$1.8 billion per year in lost “consumer surplus,” according to research by Chicago Booth’s Joseph Gerakos and Chad Syverson.

• The decline in consumer surplus reflects the value lost by a company forced to switch auditors, the drop in auditor options available to a company, and the value a company places on an extended relationship with its audit firm.

• If smaller firms don’t fill the vacuum, reduced competition among the remaining large auditors would likely lead to higher fees that could add as much as $360 million–$580 million per year, depending on which Big Four firm goes down (see chart). This amount is substantial—total audit fees for public firms amounted to $11 billion in 2010.

• Companies could incur even higher costs if regulators were to force companies to rotate auditors. The researchers find that a mandatory rotation every 10 years could cost US firms approximately $2.4 billion per year in lost consumer surplus.

Click here to download this briefing as a PDF.