Competition in Malaysian Audit Industry: What the Market is Telling Us?

Abstract

The dominance of only a few audit firms in the market is of concern due to the possibility of market abuse and subsequently poor quality of audit work. While many studies of market structure have focused mainly on developed and efficient capital markets, fewer have studied the issue in emerging markets such as Malaysia. This paper highlights the structure of Malaysian audit market and assesses the level of market competition. The results suggest that the Malaysian audit market is of oligopoly type, with the top 10 audit firms dominating more than 91 percent of the market. Interestingly, there is also evidence that one of the Big Four is losing its grip in the market and one of the non-Big Four players is eyeing a position in the top four. This indicates the possibility that the barrier to entry has begun to collapse, as smaller audit firms enjoy better opportunities to enter the market.

An explanatory review of audit market concentration and auditor workload in Malaysia

“…Similar to the concern of the USA and UK's accounting bodies e.g. PCAOB and Financial Reporting Council (FRC) UK; the audit market in Malaysia was also of oligopolistic as examined by Abidin and Mohamad-Nor (2016). There are at least two concerns with this consolidation of audit firms; (1) fewer competitors may lead to higher prices and (2) less competition may lead to a lower quality product or service.…”

“…The only exception is for the CR10 based on number of clients, indicating that the top ten firms have managed to increase their clients, albeit marginally. In 2008, the top four and Big 4 firms audited around 57.58 percent and 56.63 percent of the market as reported by Abidin and Mohamad-Nor, (2016), which reduced to 48.50 percent and 42.95 percent in 2016, respectively. Though, the market concentration is significantly reduced in Malaysia from 2008 to 2016, but still considered oligopolistic market, as concentration of market more than 40 percent considered loose oligopoly.…”

“…In Malaysian context, Abidin and Mohamad-Nor (2016) showed that, top 10 firms dominate the audit market of Malaysia in 2009. The Ernst & Young was leading the market by having the share of 26.8 percent in 2008 and 25.5 percent in the year 2009.…”

“…A concentration ratio is the ratio of the combined market shares of a given number of firms to the whole market size. In this study the market share of each firm is calculated based on the number of clients audited in the given year (Abidin et al, 2010;Karim, 2010;Dunn et al, 2011 andMohamad-Nor, 2016). The most common concentration ratios are the CR4 and the CR8, which depicts the market share of the top four and top eight firms.…”

“…For the year 2015, these firms considerably dominated the audits of United Kingdom's FTSE 100 and FTSE 250 index companies (Consultancy.uk, 2018). In Malaysia the Big 4 share was 56.63 percent in 2008, based on the number of audits (Abidin & Mohamad-Nor, 2016).…”