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

2019 ◽  
Author(s):  
Elizabeth Cowle ◽  
Tyler J. Kleppe ◽  
James Moon ◽  
Jonathan E. Shipman
Keyword(s):  
Audit Market ◽  
Big 4

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

2020 ◽  
Author(s):  
Elizabeth N Cowle ◽  
Jonathan Shipman ◽  
Tyler Kleppe ◽  
James R. Moon, Jr.
Keyword(s):  
Audit Market ◽  
Big 4

Spatial Competition in Local Audit Markets and the Fallout on Deloitte from the 2007 PCAOB Censure

2016 ◽  
Vol 36 (2) ◽  
pp. 1-19 ◽  
Author(s):  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Market Power ◽  
Audit Quality ◽  
Spatial Competition ◽  
Spatial Location ◽  
Audit Fees ◽  
Audit Market ◽  
Big 4 ◽  
Audit Fee ◽  
The Face ◽  
Market Leader

SUMMARY We examine whether Deloitte's spatial location in local audit markets affected the firm's adverse fallout—in terms of decreased ability to retain new clients and maintain audit fees—from the 2007 PCAOB censure. We motivate our inquiry by the notion that auditor-client alignment and auditor-closest-competitor distance can help differentiate the incumbent Big 4 auditor from other Big 4 auditors and thus provide market power, i.e., inhibit clients from shopping for another supplier because of the lack of a similar Big 4 provider in the local audit market. Consequently, it seems reasonable that the increase in switching risk and loss of fee growth suffered by Deloitte following the 2007 PCAOB censure will be lower in local markets where Deloitte was the market leader and its market share distance from its closest competitor was greater. Our findings suggest that the decline in Deloitte's audit fee growth rate following the 2007 PCAOB censure was concentrated in the pharmaceutical industry, although the client loss rate appears to have occurred more broadly (across all cities and industries). Collectively, our findings suggest that audit quality issues override auditor market power, i.e., differentiation does not provide Big 4 firms market power in the face of adverse regulatory action. JEL Classifications: G18; L51; M42; M49.

An Analysis of Big 4 Pricing and Firm Size: The Differential Impact of Demand and Supply Shocks on Large and Small Clients

2017 ◽  
Vol 34 (2) ◽  
pp. 204-230 ◽  
Author(s):  
Fatima Alali ◽  
Randal Elder ◽  
Jian Zhou
Keyword(s):  
Small Firm ◽  
Great Recession ◽  
Small Firms ◽  
Unique Contribution ◽  
Demand And Supply ◽  
The Great Recession ◽  
Audit Market ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Recession Period

We investigate Big 4 pricing over the period of 2000 to 2010. We classify the data into five periods: 2000-2001 as the pre-Sarbanes–Oxley Act (SOX) period, 2002-2003 as the SOX period, 2004-2006 as the Auditing Standard 2 (AS2) period, 2007 as the AS5 period, and 2008-2010 as the Great Recession period. The shocks to the audit market associated with these changes in auditing regulations and the economic environment have differential impacts on large clients and small clients. The percentage of small clients using Big 4 auditors dropped significantly over these shocks, whereas the percentage of large clients using Big 4 auditors experienced a large drop only from the SOX period to the AS2 period. We find that Big 4 pricing increased significantly from the pre-SOX period to the SOX period and continued to increase significantly in the AS2 period. Big 4 pricing experienced a significant decline in the AS5 period and declined insignificantly in the Great Recession period. Big 4 small firm pricing decreased significantly in the AS2 period compared with the SOX period and in the Great Recession period compared with the AS5 period. We find that the Big 4 pricing for small clients is contingent on the nature of competition. The Big 4 charged small firms higher prices in the SOX period, AS5 period, and Great Recession period when competition was lower. Our paper provides a unique contribution as a comprehensive analysis of Big 4 pricing and Big 4 small firm pricing.

Audit Committee Accounting Expertise and the Mitigation of Strategic Auditor Behavior

2020 ◽  
Author(s):  
James Hansen ◽  
Ling Lei Lisic ◽  
Timothy A. Seidel ◽  
Michael S. Wilkins
Keyword(s):  
Audit Committee ◽  
Market Competition ◽  
Legal Liability ◽  
Audit Committees ◽  
Credence Goods ◽  
Professional Regulation ◽  
Audit Market ◽  
Big 4 ◽  
Material Weaknesses ◽  
Accounting Expertise

Our study is motivated by the theory of credence goods in the auditing setting. We propose that audit committee accounting expertise should reduce information asymmetries between the auditor and the client, thereby limiting auditors' ability to over-audit and under-audit. Consistent with this notion, our results indicate that when audit committees have accounting expertise, clients (1) pay lower fees when changes in standards decrease required audit effort; (2) pay a smaller fee premium in the presence of remediated material weaknesses; and (3) have a reduced likelihood of restatement when audit market competition is high. Our findings in the under-auditing setting generally are strongest among non-Big 4 engagements, consistent with non-Big 4 auditors being less sensitive to market-wide disciplining mechanisms such as reputation, legal liability, and professional regulation. We also provide evidence that the nature of audit committee members' accounting expertise differentially impacts the committee's ability to curtail over- and under-auditing.

The Audit Market Dynamics in a Mandatory Joint Audit Setting: The French Experience

2016 ◽  
Vol 33 (4) ◽  
pp. 463-484 ◽  
Author(s):  
Lamya Kermiche ◽  
Charles Piot
Keyword(s):  
Market Concentration ◽  
Policy Makers ◽  
Audit System ◽  
Audit Market ◽  
Big 4 ◽  
Long Run ◽  
French Experience ◽  
Economic Support ◽  
Different Types ◽  
Potential Benefits

Policy makers in France have considered joint audits as a solution to mitigate the audit market concentration and the “systemic” risk associated with Big 4 auditors. We implement a Markovian analysis where audit clients chose between different types of combinations across Big 4 and smaller auditors. Our main findings support the view that the French joint audit system is effective in maintaining market openness and in mitigating the Big 4 domination in the long run. An investigation of the determinants driving changes in joint audit combinations suggests little economic support in favor of two Big 4 combinations, whereas changes in audit clients’ agency costs (e.g., higher ownership concentration) tend to explain the performance of mixed and two non-Big 4 combinations. Overall, this study supports the European Commission’s position on the potential benefits of joint audits in mitigating the market concentration; it also suggests that it might not be necessary to impose mixed joint audits to achieve that objective.

Determinants and Market Consequences of Auditor Dismissals after Accounting Restatements

2013 ◽  
Vol 89 (3) ◽  
pp. 1051-1082 ◽  
Author(s):  
Karen M. Hennes ◽  
Andrew J. Leone ◽  
Brian P. Miller
Keyword(s):  
Financial Reporting ◽  
Market Reaction ◽  
Data Availability ◽  
Executive Turnover ◽  
Corporate Boards ◽  
External Auditors ◽  
Audit Market ◽  
Big 4 ◽  
Financial Restatements ◽  
Market Consequences

ABSTRACT This study examines the conditions under which financial restatements lead corporate boards to dismiss external auditors and how the market responds to those dismissal announcements. We find that auditors are more likely to be dismissed after more severe restatements but that the severity effect is primarily attributable to the dismissal of non-Big 4 auditors rather than Big 4 auditors. We also document that among corporations with Big 4 auditors, those that are larger and more complex operationally are less likely to dismiss their auditors. Combined, this evidence suggests that firms with higher switching costs and fewer replacement auditor choices are less likely to dismiss their auditors after a restatement, which is informative to the debates about the costs and benefits of mandatory auditor rotation and limited competition in the audit market. Additionally, we examine contemporaneous executive turnover and find evidence that boards view auditor dismissals as complementary rather than substitute responses to restatements. Finally, we investigate the market reaction to auditor dismissals after restatements. The market reaction to the dismissal is significantly more positive following more severe restatements (5.9 percent) relative to less severe restatements (0.6 percent) when the client engages a comparably sized auditor. This positive market reaction is consistent with firms restoring financial reporting credibility by replacing their auditors and highlights the important role that auditors play in the financial markets. Data Availability: Data are available from public sources indicated in the text.

Risk Shifts in the Market for Audits: An Examination of Changes in Risk for “Second Tier” Audit Firms

2009 ◽  
Vol 28 (2) ◽  
pp. 93-118 ◽  
Author(s):  
Chris E. Hogan ◽  
Roger D. Martin
Keyword(s):  
Business Risk ◽  
Switching Activity ◽  
Publicly Traded ◽  
Audit Market ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Audit Firms ◽  
Risk Characteristics ◽  
Changes In Risk ◽  
Second Tier

SUMMARY: The market for audit services has been affected in recent years by significant changes like the demise of Andersen and the implementation of the Sarbanes-Oxley Act of 2002. One impact of these market changes has been an increase in the frequency of auditor switches, and in particular, the frequency of clients switching from Big 4 auditors to smaller audit firms. We examine whether this switching activity has resulted in changes in the risk characteristics of publicly traded clients of Second Tier audit firms. This analysis is important as regulators are concerned about audit market concentration and would like to see the Second Tier audit firms expand their share of the publicly traded client market. Results indicate that Second Tier firms are accepting clients with potentially increased audit and client business risk characteristics relative to their existing client base, but they also appear to be “shedding” clients that have increased audit and client business risk characteristics relative to their existing client base. Some of the differences in risk characteristics for those departing clients are more pronounced in the period after 2000, when we expect the most significant changes in the audit market occurred. Second Tier auditors are increasingly exposed to more business risk as they accept larger clients coming from Big 4 predecessor auditors, which may increase their exposure to litigation.

Audit prices and Big 4 fee premiums: further evidence from Thailand

2017 ◽  
Vol 7 (1) ◽  
pp. 2-15 ◽  
Author(s):  
Thanyawee Pratoomsuwan
Keyword(s):  
Price Competition ◽  
Stock Exchange ◽  
Audit Fees ◽  
Audit Pricing ◽  
Content Type ◽  
Audit Market ◽  
Big 4 ◽  
Audit Fee ◽  
The Usa ◽  
Using Data

Purpose Because there is mixed evidence regarding Big N fee premiums across countries, the purpose of this paper is to re-examine the phenomenon of audit price differentiations in the market for auditing services in Thailand. Although Hay et al. (2006) and Hay (2013) reviewed over 80 audit fee papers from 20 countries over 25 years, 13 of which were based in emerging economies, the understanding of the market for auditing services in Thailand remains limited. Because the Thai auditing market is also classified as a segmented market – i.e., a market that is less competitive for large-client firms and more competitive for small-client firms – this study tests audit price competition in an emerging audit market using Thailand as an example. Design/methodology/approach The traditional audit fee model is used to estimate audit fee premiums for a sample of over 300 non-financial companies listed on the Stock Exchange of Thailand in 2011. Findings Although the market for auditing services in Thailand is consistent with that described in Ferguson et al. (2013) – in which Big N audit firms dominate only the large-client segment – the results show that Big N auditors charge higher audit fees and earn higher fee premiums compared with non-Big N auditors in both the small- and large-client segments of the audit market. Research limitations/implications The evidence from this study reveals the existence of Big N fee premiums across market segmentations. Audit price differentials between Big N and non-Big N firms in both small- and large-client market segments might concern regulators regarding competition in the audit market with respect to whether the Big N firms are charging uncompetitive audit fees. These findings also imply that audit pricing varies across countries and the Big N price deferential is typically larger in emerging markets than in more developed audit markets and that it might be inadequate to study single-country audit pricing. However, the question whether the Big N fee premium results from Big N product differentiation is not directly investigated in this study. Originality/value Because earlier studies focusing on audit fee premiums have been conducted using data from the USA and Australia, the findings add to the limited evidence regarding audit fee premiums in an emerging country such as Thailand.

scholarly journals Joint audit, audit market concentration, and audit quality: Perceptions of stakeholders in the UAE

2020 ◽  
Vol 17 (2) ◽  
pp. 32-45
Author(s):  
Yasser Barghathi ◽  
Esinath Ndiweni ◽  
Alhashmi Aboubaker Lasyoud
Keyword(s):  
Emerging Economies ◽  
Audit Quality ◽  
Practical Implication ◽  
Market Concentration ◽  
Structured Interviews ◽  
Face To Face ◽  
Audit Market ◽  
Quality Perceptions ◽  
Big 4 ◽  
The Cost

The present study is intended to scholarly explore auditors’ perceptions regarding joint audits; whether it can improve audit quality. To reach this goal, participants were enrolled from Big 4, non-Big 4, and other stockholders. In addition, the present study examines the perception of the same stakeholders in terms of how audit concentration affects the audit market in the UAE. Being a qualitative study, 12 semi-structured interviews were conducted to collect required data; 4 face to face and 8 through using Google forms. The finding of the study revealed mixed perception regarding joint audits; it may improve audit quality at the cost of high fees and free-rider problems. Findings of the study has practical implication for policymakers of emerging economies around the globe, such as policymakers who can make joint audits as compulsory. Another significance of the present work is that it has allowed for the perception of stakeholders, who are at the center of the controversial subject of joint audits and audit market concentration. The study suggests that there is a need for removing language barriers; it will benefit some firms in the form of directly communicating with auditors either in English or in Urdu.

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