Big 4, Next 4, and Smaller Audit Firms: Market Realignment
This paper reviews Cullinan and Du's research on auditor-client realignments among publicly traded companies between 2003 and 2008. It examines whether shifts in market share away from Big 4 accounting firms are driven by auditor resignations or client dismissals, and introduces a three-tier audit market framework that distinguishes Big 4, "Next 4," and Smaller Firms. The review summarizes the study's literature review, methodology, findings, and conclusions, noting that Next 4 firms resign at significantly higher rates, Big 4 firms charge materially higher fees, and auditor realignment decisions are predominantly client-driven. The reviewer also offers personal observations on the study's strengths and limitations.
- Introduction and Background: Overview of Big 4 market share decline and study scope
- Literature Review: Three-tier audit market and resignation versus dismissal drivers
- Methodology: Data source, variables, and analytical approach used
- Findings and Conclusions: Next 4 resignation rates, fee differences, and client-driven realignment
- Personal Observations: Reviewer critique of conclusions and demand-capacity gap
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What makes this paper effective
- The review follows a clear, logical structure — purpose, literature, methodology, findings, and personal observations — making it easy to follow and evaluate.
- The personal observations section adds critical value by identifying gaps in the original study, such as the absence of a formal conclusion and the underexplored demand-capacity tension facing Next 4 firms.
- The paper demonstrates disciplined use of the three-tier classification framework, consistently applying the Big 4 / Next 4 / Smaller Firms distinction throughout to reinforce the review's central argument.
Key academic technique demonstrated
This paper exemplifies critical article review writing — summarizing a scholarly source's purpose, methodology, and findings while offering evaluative commentary. The reviewer goes beyond description by identifying logical extensions the original authors did not pursue, such as whether Next 4 firms could reduce excess demand by raising fees closer to Big 4 levels.
Structure breakdown
The paper opens with a brief introduction to the topic and source article. It then moves through a structured summary covering the research purpose, literature review, methodology, and findings in sequence. The final section departs from summary to deliver the reviewer's own critical assessment, noting both the article's relevance and its abrupt ending. The structure mirrors a standard annotated article critique common at the undergraduate level.
Introduction and Background
"Big 4, 'Next 4,' and Smaller Accounting Firms: Resignations v. Dismissals and the Outcome of the Auditor Change Process" by Dr. Charles P. Cullinan and Dr. Hui Du addresses the issue of auditing services among publicly traded companies. The article begins by noting that there has been a general loss of market share by Big 4 firms, amounting to a decrease of roughly half — from 44% to 22%. The article examines whether this decline is the result of accounting firms resigning from clients or client decisions to change auditors.
The purpose of investigating these realignments of auditor-client relationships culminates in the more specific objective of the paper: to examine auditor-client realignments between 2003 and 2008 and determine whether they are driven by auditors or by clients. Furthermore, the research is unique in its focus not only on the traditional Big 4 vs. non-Big 4 paradigm, but also on a new tier of firms known as the "Next 4." Firms that are neither Big 4 nor Next 4 are referred to as "Smaller Firms."
Literature Review
In addition to an extensive literature review, this section of the paper also presents the research questions to be examined. The literature review encompasses several areas relevant to the purpose and goal of the article. The authors note, for example, that the auditor change literature generally recognizes only Big 4 and non-Big 4 auditing firms. Other areas of auditing literature are somewhat more flexible, examining a three-tier market for audit services and recognizing sufficient differences among auditing firms to warrant a classification tier between the Big 4 and Smaller Firms.
In addition to an examination of auditor resignation vs. dismissal, the literature reviewed also indicates differences in the nature of auditor resignation, finding that increased litigation risk makes it more likely for auditors to resign from their clients.
Another important issue addressed in the literature is that auditors tend to be dismissed when their fees are perceived as excessively high relative to the services provided. This generally occurs in the case of Big 4 firms, where clients tend to replace their auditors with lower-tier professionals who charge less for comparable services.
Methodology
The researchers began their work by obtaining a list of auditor changes for the years under examination from AuditAnalytics. A clear distinction was maintained between auditor changes resulting from resignation and those resulting from dismissal.
The main variable for the study is the tier of the accounting firm in question, with Big 4, Next 4, and Smaller Firms coded as 3, 2, and 1 respectively. Analyses were performed to determine: the prevalence of resignations among the different types of accounting firms; the relationship between tier status and audit fee; and the likelihood of engaging a lower-tier audit firm when an audit firm has resigned.
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