The Post-SOX evolution of the client portfolio of the second tier: A Focus on restatement and internal control risk

R. Mithu Dey
Ashok Robin

Note: imported from RIT’s Digital Media Library running on DSpace to RIT Scholar Works in February 2013.


The Post-SOX era coincides with the rise of the Second Tier auditing firms. Our study tests risk characteristics of new (and departing) clients versus continuing clients of the Second Tier to judge overall risks faced by this auditing tier. Because of the greater incidence of restatements in the post-SOX era and because SOX itself triggered disclosure of internal control weaknesses (ICW), we focus on these two risk indicators. We show that the new clients of the Second Tier indeed have higher levels of restatements and ICW, but we also note that departing clients also show a similar high risk profile. We confirm the widely held belief that the Second Tier is gaining market share, but this gain appears to be achieved in a controlled manner. We base this conclusion on the facts that (a) most of their new clients dismissed their previous auditors thereby dispelling the notion that the Second Tier is only gaining clients because the Big 4 are jettisoning high risk clients and (b) the Second Tier is letting go of high risk clients especially those with restatement risk. Finally, because we use a fairly long post-SOX sample period, we argue that our results reflect a persistent shift in the auditing market and not just an immediate reaction to SOX or Arthur Andersen.