Audit Firm Split-Up : The Effect on Audit Quality and Audit Fees

Using a game-theoretical model, we examine reasons and driving forces for audit firm split-ups, like the case of EY. In addition, we also analyze the potential consequences of audit firm split-ups on both the audit market and the audit quality. We find that the split-up decision is mainly driven by two aspects, the audit failure probability and spillovers from audit to advisory. As the audit quality suffers from a loss of advisory expertise, on the one hand, but benefits from the reduction of independence problems, the effect on audit quality is ambiguous. Moreover, we show that although combined audit firms can generate returns from advisory, a stand-alone audit firm sometimes offers a lower audit fee