The Big Four – Deloitte, Ernst & Young, KPMG and PwC – command nearly three quarters of global audit market according to the International Accounting Bulletin, but Cowle’s research, which has been published in The Accounting Review, suggests that nearly two decades after the act was codified, the Big Four’s increasing focus on consulting may be prompting a shakeup in the audit market. Cowle’s research fails to find any negative impact on audit quality for clients that switch away from the Big Four likely for consulting-related reasons.

“The regulatory decision to restrict the provision of both audit and non-audit services may have actually inadvertently created a mechanism to open up potential market share for these smaller firms and allow them to come in and grow their audit client market share while maintaining an acceptable standard of audit quality,” Cowle said.

Shifting to consulting from audit accounting

Taking a pulse of industry trends was a large job for the researchers. Drawing from transcripts from 3,360 companies’ quarterly conference calls between 2007 and 2016 across 153 auditors, Cowle and her coauthors used a technique called Latent Dirichlet Allocation, a form of topic modeling to identify topics related to consulting covered in the calls.

Once topics were identified, the team compared those to consulting services publicly advertised on the Big Four’s websites. From there, the authors compared the topics for which companies indicated a need during calls against accounting firms’ service offerings to measure the similarity between “what the client needs” and “what the accounting firms offer.” When applied to a client, the measure provides an estimation of each company’s consulting opportunities.

Their measure of client-specific consulting opportunities was then used to analyze how consulting opportunities and the reemergence of Big Four consulting practices have impacted the audit market, including whether auditor switches occur more frequently in the presence of more consulting opportunities, and how these consulting-driven switches affect subsequent auditor choice and audit quality. With an existing relationship between a client and an accounting firm, it often makes business sense for both parties to transition from lower-margin, higher-risk audit services to a more highly engaged – and more lucrative for audit firms – consulting relationship.

“The client could see room for future consulting and say, ‘I know I like this firm, I know this firm does great work in this area. I’d rather have them as my consulting firm than my audit firm,” Cowle said. “Alternatively, the firm could view their firm as better positioned to perform consulting work for the client. We think that the firms likely leverage existing client relationships and ask, ‘Does this make sense for us to continue on as your auditor or consultant?’”

Informing policy and practice

In addition to illuminating an unidentified consequence of Sarbanes-Oxley that can help fight concentration in the audit marketplace, Cowle’s research has practical consequences for policymakers and industry. Firms can use the new perspective to inform client selection and retention policies, weighing whether audit or consulting services would be a better fit for a specific client, ultimately saving clients the considerable trouble and expense of swapping firms in the future.

Regulators have expressed concerns that as the Big Four grow their focus on consulting, audit quality will suffer. The research shows those concerns may be unfounded.

“Our findings suggest the decision to limit the provision of both consulting and audit work to the same client has actually inadvertently provided this mechanism that reduces Big Four market share,” Cowle said. “It has opened up opportunities for smaller firms to grow their market share while still maintaining a similar standard of quality.”