Client Consulting Opportunities and the Reemergence of Big 4 Consulting Practices: Implications for the Audit Market

Consulting service revenues recently surpassed those from audit as the primary revenue source for the largest accounting firms. Since SOX limits the provision of consulting services to audit clients, this shift in revenues implies that firms and many clients likely choose between audit and consulting relationships. We explore the implications of this by developing and validating a measure of client-level consulting needs that can likely be fulfilled by accounting firms, which we refer to as “consulting opportunities.” We find that consulting opportunities relate positively to auditor switches and negatively to Big 4 auditor selection, the firms focusing most on consulting. We fail to find evidence that consulting opportunities relate to post-switch changes in audit quality, suggesting that consulting-driven realignments do not produce suboptimal auditor-client matches. Our results suggest that legislation limiting firms’ ability to deliver consulting services to audit clients may have reduced audit market concentration without discernably impacting quality.