Barriers to entry to the big firm audit market: Evidence from market reaction to switches to second Tier audit firms in the post-sox period

Cullinan, Charles P.; Du, Hui; Zheng, Xiaochuan

doi:10.1016/j.racreg.2011.12.002

Cited by 12 publications

(8 citation statements)

References 27 publications

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“…Big N firms’ market power has been investigated continuously. Recent studies examine the market power of Big N firms and the impact of market power on competition in the audit industry and on audit fee premiums (Carson et al , 2012; Cullinan et al , 2012; Campa, 2013; Numan and Willekens, 2012; Ferguson et al , 2013). The mergers of large audit firms have caused the number of the largest audit firms to shrink, leading to the emergence of the Big 4 auditors; this outcome has raised regulatory concerns regarding the impact of this shift in the audit industry.…”

Section: Prior Research and Hypothesis Developmentmentioning

confidence: 99%

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

Pratoomsuwan

2017

JAEE

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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.

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Section: Prior Research and Hypothesis Developmentmentioning

confidence: 99%

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

Pratoomsuwan

2017

JAEE

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“…shareholders, creditors, etc.) could be of major significance in their unwillingness to consider local audit firms (Cullinan et al ., 2012).…”

Section: Introductionmentioning

confidence: 99%

External auditor type, discretionary accruals and investors’ reactions

Abdallah

2018

JAEE

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Purpose The purpose of this paper is to investigate, in an Egyptian context, the external auditor type (Big 4 vs local) implications on reporting quality proxied by discretionary accruals (DA) and also examine whether auditor type impacts the market’s pricing of DA, where pricing is considered a proxy for the perceived DA quality. Design/methodology/approach The sample period is 2012–2015, that is meant to be post the Egyptian revolution financial crisis; all Egyptian stock exchange (EGX) listed firms (except banks and financial institutions) are considered. DA are estimated using modified Dichev and Dechow’s (2002) model (McNicholas, 2002). Ordinary least squares regression tests are used to investigate the external auditor type implications on DA level and the related EGX investors’ pricing. Findings The findings generally show the external auditor’s minimal role in mitigating DA. Moreover, the findings reflect the EGX investors’ negligence and/or lack of confidence in regards to DA and external auditor type factors in stock pricing. Practical implications The paper findings highlight to regulators the need for effective monitoring of audit firms earnings management mitigation performance to help reinforce investor confidence in financial reporting quality. Originality/value This paper is the first that investigates the external auditor monitoring mechanism implications on investors’ perceptions of earnings quality in Egypt. The paper findings would provide important contributions, particularly post the Egyptian revolution crisis, where the EGX market is trying to restore the investors’ confidence.

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“…Church and Shefchik (2012) find that PCAOB inspection reports of the Big 4 are generally consistent with those of the second-tier. Cullinan et al (2012) find that the market does not react more negatively when clients move from a Big 4 to a second-tier auditing firm than when clients move from a Big 4 to another Big 4 firm. Gray and Ratzingler (2010) find that a component of the positive change is attributed to the fact that many new second-tier clients were previously with the Big 4.…”

Section: Second-tier Audit Qualitymentioning

confidence: 73%