Market for former Andersen clients: Evidence from government and non-profit sectors

The impact of the failure of Andersen on the market for audit services in the government and non-profit sectors has received limited attention from researchers. Given the growing role of these sectors in the US economy, I examine the market for former Andersen clients in the government and non-profit sectors. Specifically, I determine whether the resource dependency framework and switching costs can help explain a non-profit’s propensity to follow its Andersen audit team to a new firm. I also provide descriptive data regarding the type of firm hired subsequent to Andersen and the impact of this switch on audit fees. I find that the presence of switching costs, the financial condition of a non-profit, and the size of the market are associated with the propensity of a non-profit to follow its Andersen audit team to a new firm. Unlike in the for-profit sector [Blouin, J., Grien, B., Roundtree, B., 2007. An analysis of forced auditor change: The case of former Arthur Andersen clients. The Accounting Review 82 (3), 621–650], non-profits in my sample do not appear to be concerned about the need for greater monitoring in their decision to follow their Andersen audit team to a new firm. Their primary motivation appears to be the desire to reduce switching costs.