The Relationship between Audit Market Competition and Audit Fee

SUMMARY We respond to calls for research into the effect of the decline in the number of Big N firms on market power and consequential impact on competition (U.S. Department of the Treasury 2008; European Commission 2010; U.K. House of Lords 2011) by analyzing the change in Big N audit fee premium over the Big 6, Big 5, and Big 4 periods, and across different client segments. Using a large sample of Australian publicly listed companies over the years 1996–2007, we find that while premiums paid to Big N auditors have increased significantly for the Big 4 and Big 5 periods compared to the Big 6 period, the growth has not been shared equally across all client segments. In particular, while the largest global clients pay some of the highest premiums, the increase in premiums for this group in the Big 4 period has been lower than those experienced by other clients. We also observe that premiums paid to industry specialists have declined relative to the Big 6 period, but fee discounts offered to clients switching to a Big N auditor from a non-Big N auditor have increased. In all, we find that the premiums paid by Big N clients increased in line with consolidation in the number of Big N audit firms, but the impact varied across client segments.

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Does a Lack of Choice Lead to Lower Quality? Evidence from Auditor Competition and Client Restatements

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50461 ◽

2013 ◽

Vol 32 (3) ◽

pp. 31-67 ◽

Cited By ~ 80

Author(s):

Nathan J. Newton ◽

Dechun Wang ◽

Michael S. Wilkins

Keyword(s):

Audit Quality ◽

Negative Impact ◽

Market Competition ◽

Ongoing Debate ◽

Policy Makers ◽

Generally Accepted Accounting Principles ◽

Market Participants ◽

Audit Market ◽

Financial Restatements ◽

The Relationship

SUMMARY: We examine the relationship between auditor competition and the likelihood of financial restatements that occur as a result of failures in the application of generally accepted accounting principles (GAAP). Policy makers and audit market participants have expressed concern that the current level of auditor competition is low, resulting in a negative impact on audit quality. However, we find that restatements are more likely to occur in metropolitan statistical areas (MSAs) that have higher auditor competition. The association between audit market competition and restatements is statistically and economically significant. Our finding of a positive relationship between the likelihood of restatement and audit market competition is relevant to the ongoing debate regarding audit quality and the concentration of audit markets.

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Market Competition, Audit Fee Stickiness, and Audit Quality: Evidence from China

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-52173 ◽

2018 ◽

Vol 38 (2) ◽

pp. 79-99 ◽

Cited By ~ 2

Author(s):

Hsihui Chang ◽

Yingwen Guo ◽

Phyllis Lai Lan Mo

Keyword(s):

Earnings Management ◽

Audit Quality ◽

Market Competition ◽

Positive Association ◽

Certified Public Accountants ◽

Listed Firms ◽

Audit Market ◽

Audit Firms ◽

Audit Fee ◽

Auditor Reporting

SUMMARY This study examines how audit fee stickiness varies with changes in market competition in China and its effect on audit quality. The Chinese audit market structure has changed significantly since the Chinese Institute of Certified Public Accountants (CICPA) issued a proposal to enhance the competitiveness of large domestic audit firms by promoting the consolidation of domestic audit firms in 2007. Using a sample of Chinese listed firms, we find a decrease in upward stickiness and an increase in downward stickiness as market concentration increases in the post-Proposal period. The asymmetry between upward and downward fee stickiness is greater in local markets that are more dominated by the top 10 domestic auditors. Moreover, we find that upward (downward) fee stickiness has a negative (positive) association with audit quality as measured by earnings management and auditor reporting conservatism. JEL Classifications: D40; M42.

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A Study on the Factors Affecting the Relation between R&D Investment Activities and Firm Value -Focusing on Audit Market Competition-

Technology Management ◽

10.33443/tm.2018.3.4.83 ◽

2018 ◽

Vol 3 (4) ◽

pp. 83-98

Author(s):

Park Hyun Jae

Keyword(s):

Firm Value ◽

Market Competition ◽

Factors Affecting ◽

Audit Market ◽

D Investment

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

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-51571 ◽

2016 ◽

Vol 36 (2) ◽

pp. 1-19 ◽

Cited By ~ 5

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.

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