The effect of audit market structure on audit quality and audit pricing in the private‐client market

Raak, Jeroen van; Peek, Erik; Meuwissen, Roger; Schelleman, Caren

doi:10.1111/jbfa.12414

Cited by 20 publications

(20 citation statements)

References 93 publications

(132 reference statements)

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“…The empirical evidence on the impact of AMC on audit quality is contradictory. For instance, increased AMC is associated with lower audit quality for complex clients (Gunn et al, 2019) and with less complex SME-client segments (van Raak et al, 2020). However, some studies (e.g., Willekens et al, 2020) found a lack of association between AMC and audit quality.…”

Section: Audit Qualitymentioning

confidence: 99%

“…Others (e.g., Asthana et al, 2019;Chang et al, 2019;Huang et al, 2016) found evidence of a positive association between AMC and audit quality. This could be because, for instance, AMC motivates big firms to improve their efficiency (Newton et al, 2013) and helps to achieve scale economies in audit technology and resources (van Raak et al, 2020), while mergers increase audit quality (Cahan et al, 2021). Moreover, economic theory suggests that competition incentivizes suppliers to compete not just over prices but also over quality (Domberger & Sherr, 1989); clients want high-quality audits, while more competition among audit firms facilitates higher audit quality (Ettredge et al, 2020).…”

Section: Audit Qualitymentioning

confidence: 99%

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A Review of the Empirical Literature on Audit Market Concentration

2023

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Synopsis The research problem The extant audit market concentration (AMC) literature is quite scattered, which makes it challenging to comprehend the current state of knowledge and to highlight the areas that require further exploration. An improved understanding of AMC and its possible effects require a comprehensive review of the AMC literature, since no such review has yet been published. Therefore, our paper intends to: (a) synthesize the empirical work in the AMC literature; (b) determine the limitations in the ways AMC has been investigated; (c) identify avenues of inquiry that could guide future thinking on AMC; and (d) develop insights into how future AMC investigations can be further developed. Motivation The most noticeable developments in AMC occurred after the audit firm megamergers of the 1980s and 1990s and Andersen’s demise in 2002. This trend toward fewer and larger suppliers of auditing services has sparked intense debate about the costs and benefits of AMC. However, the literature provides mixed evidence on the determinants and consequences of AMC. Adopted methodology A structured literature review [Massaro, M., Dumay, J., & Guthrie, J. (2016). On the shoulders of giants: Undertaking a structured literature review. Accounting, Auditing and Accountability Journal, 29(5), 767–801. https://doi.org/10.1108/AAAJ-01-2015-1939 ] was employed to review the extant AMC literature. Analyses We analyzed 108 empirical papers published in 39 peer-reviewed quality accounting and auditing journals in the English language over a 55-year period (1967 to mid-2021). Findings The analysis suggests a consistent rise in AMC levels, leading to a tight oligopoly and, in rare cases, to a duopoly, across countries and over time. Studies of audit pricing and audit quality comprise the predominant part of the literature, and these report mixed findings as to whether AMC facilitates monopolistic pricing and allows audit-quality-threatening behaviors. This could be attributed to several factors, including the focus on short-term effects of AMC; substantial variations in how concentration was measured; and misguided use of proxies for audit competition and audit quality. The review identifies four key limitations that circumscribe our understanding of AMC: (a) the lack of investigation into the actual dynamic rivalry among audit firms; (b) great reliance on the positivistic approach and quantitative methods, and the lack of use of explicit theories aside from economic theories; (c) a focus on the audit of publicly listed companies in the United States, the U.K., and Australia; and thus; (d) the absence of key organizational settings and central regions in the AMC debate. To counter these limitations, this review puts forward possible future research avenues that can help to advance our understanding of AMC to address emerging challenges in the field.

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Section: Audit Qualitymentioning

confidence: 99%

Section: Audit Qualitymentioning

confidence: 99%

A Review of the Empirical Literature on Audit Market Concentration

2023

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“…This opens up a unique research opportunity on whether audit quality changes when client firms switch from Big 4 firms to Non-Big 4 firms in this client segment. Second, the change in market shares of the different types of firms in the medium and small client segment raises questions on whether audit firms compete on lower audit fees rather than higher audit quality (Pearson and Trompeter, 1994; van Raak et al, 2020). Competitive pricing could encourage the supplier of a credence good to under-audit their clients compared to a situation in which market players cannot compete on price, resulting in lower audit quality (Mimra et al, 2016).…”

Section: Audit Market Competitionmentioning

confidence: 99%

The audit market for listed Australian companies from 2012 to 2018: A state of play

Carson

Thürheimer

et al. 2022

Australian Journal of Management

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Motivated by recent regulatory scrutiny of auditing in Australia, we provide an overview of the audit market for Australian listed companies from 2012 to 2018. Using descriptive analyses, we explore audit market competition, the provision of non-audit services (NAS), and audit firm tenure. We find that the Australian audit market is highly segmented. Big 4 firms increasingly dominate the larger client segment, while Non-Big 4 firms focus on medium and smaller clients. Auditor-provided NAS fees represent a relatively small fraction of audit fees for smaller clients, but a relatively high fraction for larger clients. We further observe that the share of total revenue from NAS of Big 4 firms increases over time. Finally, a relatively small percentage of clients has long audit firm tenure, and that long tenure is more common in the larger client segments. We discuss the implications of these findings and research opportunities that emerge. JEL Classification: D40, L11, M42, L84

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“…To gain a fuller understanding of how product similarity impacts auditor pricing strategies, we also examine whether the effect of product similarity on audit fees differs between auditors with a larger market share (e.g., industry specialists) and auditors with a smaller market share. Prior studies show that auditors with a larger market share are better able to obtain economies of scale and provide higher quality services (e.g., Mayhew & Wilkins, 2003; Numan & Willekens, 2012; Raak et al., 2020). However, in order to do so, these industry specialists must make a greater investment in technology and personnel than their competitors (e.g., Dopuch & Simunic, 1982; Habib, 2011).…”

Section: Hypotheses Developmentmentioning

confidence: 99%

Does product similarity of audit clients influence audit efficiency and pricing decisions?

Chang

Hsu

2021

Business Fin & Account

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We examine how client product similarity within an auditor's portfolio affects audit efficiency and pricing decisions. Using a unique set of intra-portfolio client-level data, we find that clients with product offerings more similar to those of other clients in the auditor's portfolio are charged lower audit fees and experience a shorter audit reporting lag, suggesting that product similarity contributes to audit efficiency. In a crosssectional analysis, we also find that the effect of product similarity on fee reduction is greater when knowledge transfer across clients is more useful in improving audit efficiency.Finally, we find that industry specialists reduce fee premiums for clients whose products are more similar to those of other clients in their portfolios, consistent with the conjecture that client product similarity helps specialists build up their market positions while improving their audit efficiency.

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The effect of audit market structure on audit quality and audit pricing in the private‐client market

Cited by 20 publications

References 93 publications

A Review of the Empirical Literature on Audit Market Concentration

A Review of the Empirical Literature on Audit Market Concentration

The audit market for listed Australian companies from 2012 to 2018: A state of play

Does product similarity of audit clients influence audit efficiency and pricing decisions?

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