The Big Four Audit Fee Premium After Sarbanes-oxley Act

Open Access
Li, Meng
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Oranee Tawatnuntachai, Thesis Supervisor
  • Ronald Walker, Honors Advisor
  • Thomas Townsend Amlie, Faculty Reader
  • Sarbanes-Oxley Act
  • Audit Fee Premium
  • Audit Market Pricing
  • the Big Four
Many prior studies have examined whether large auditing firms charge higher fees, which is known as the audit fee premium. The amount of fee premium varies significantly from different studies, ranging from 0% to 63%. Large fee premium can be a temporary effect caused by audit market change, such as mergers. Or it can be long-term effect that signals the lack of competition in the audit market and the dominant power of large auditors. Most recent studies have focused on how Sarbanes-Oxley Act affects the fee premium. They find an increasing audit fee premium immediately after the Sarbanes-Oxley Act (SOX). In a study, Ebrahim (2010) conclude that the fee premium gradually declines as he observe the decline of fee premium in 2005 and 2006. However, his sample period ends 2006; and hence his results show only the short-term effect of the SOX. The long-term effect might not be the same as the short-term effect. To address the sample period limitation, this study extends the sample period to 2014 and finds the opposite results to Ebrahim’s study. Three models, OLS regression, Heckman two-stage self-selection and semi-parametric matching models, are used to estimate the premium. The results of all three models suggest the overall premium from 2000 to 2014 of 29.4%. The results of OLS regression and the semi-parametric matching model suggest that the fee premium does not decline, but continues to increase, after 2006. The results indicate the unequal power between large and small auditors should raise the market’s attention and encourage more investigations on the causes.