The impact of another Andersen

Both these questions are being addressed in the debate over competition and
choice in the audit market. A new academic study of the demise of Andersen might
give some answers.

Academics Mark Kohlbeck from Florida Atlantic University, Brian Mayhew and
Pamela Murphy from the University of Wisconsin, and Michael Wilkins from A&
M University in Texas, looked at both the strategies of the Big Four after
Andersen’s demise, and what happened to fees.

The story, broadly, is that two of the Big Four – KPMG and E&Y – focussed
on purchasing former Andersen offices. In doing so, they acquired the lion’s
share of Andersen’s former clients.

That led to several things happening, and how you did in terms of audit fees
depended very much on where you were within this dynamic.

Clients that stayed with a purchased Andersen office experience significantly
higher fees, the study says, suggesting that should any of this come to pass
again, the trick from a company point of view is to shop around.

Where an Andersen office existed somewhere, and it was too risky for whatever
reason to purchase, corporates who had been Andersen clients experienced
‘low-balling,’ i.e. significant reductions in their fees. One might speculate
therefore that Houston corporates, whose local Andersen office would certainly
have been risky, might not have done too badly out of Enron after all.

There is another point though. Of those who switched early on, there is a
significant disparity in how they did. Small firms, with plenty of auditors to
choose from, got lower fees. Larger firms, with assets greater than $5bn, paid a
premium for their new auditor.

That would appear to be the real challenge, then. It’s not the audit market
as a whole that has competition issues, but the real top end businesses with the
big bucks.

Would it happen the same way, though, if another Big Four firm went down?
Time will tell.