The effect of large audit firm mergers on audit pricing in the UK

Abstract

This paper examines the effects on UK audit market concentration and pricing of mergers between the large audit firms and the demise of Andersen. Based on data over the period [1985][1986][1987][1988][1989][1990][1991][1992][1993][1994][1995][1996][1997][1998][1999][2000][2001][2002], it appears that mergers contributed to a rise in concentration ratios to levels that suggest concern about the potential for monopoly pricing. The high concentration ratios have not improved the level of price competition in the UK audit market. Our pooled models suggest that concentration ratios are associated with higher audit fees. The evidence suggests that the effects of mergers between big firms on brand name fee premium and on price competition vary depending on the particular circumstances. The brand name premium is strongest for the largest quartile of companies prior to the mergers. After the Big Six mergers, the premium increases for average-sized companies but falls for the smallest and largest companies. Following the PricewaterhouseCoopers merger, the premium increases for below median-sized clients but decreases for above median sized clients. For the Deloitte-Andersen transaction, the premium falls for the smallest and largest companies but increases for those in the second quartile. Our results provide evidence that auditees are likely to pay higher fees if their auditor merges with a larger counterpart. We attribute merger-related fee hikes to product differentiation, rather than anticompetitive pricing.3

IFRS adoption and audit and non-audit fees: empirical evidence from Spanish listed companies

“…In addition, converse to prior studies (Kim et al, 2012), we conduct separated analyses over homogeneous groups of companies to avoid any bias due to the collateral influence, in case, of the voluntary adopters on audit fees. Finally, since audit and non-audit fees provided by the same auditing group are interconnected (Antle et al, 2006;Krishnan & Yu, 2011;McMeeking et al, 2007;Stein, 2006; among others), we also explore variations in non-audit fees and total fees.…”

“…The boundaries between audit and consultancy services remain a matter of research interest. Some studies find a bilateral and positive influence (Antle et al, 2006;Stein, 2006or McMeeking et al, 2007, supporting the flows of knowledge between the two services (in Spain, Monterrey & SanchezSegura, 2007or de Fuentes & Pucheta-Martinez, 2009). Thus, a decrease/increase in consultancy services might be balanced with an increase/decrease in audit services such as the total amount of fees is not outstandingly altered.…”

Structure and Nature of Competition in the Market for Financial Audit Services in Mexico

“…The results indicate that after the merger there are reductions in the costs of audits, or collusion among audit firms to raise prices. McMeeking et al, (2007) examined the effects of mergers between large international firms and the effects after the resignation of the international firm Arthur Andersen on the concentration, and price competitiveness of the audit market in the UK. The results of the study indicate that large international audit firms increased their market shares between 1985 and 2002 because of mergers and expansion into new sectors.…”

“…The study of the financial audit market structure, its competitive nature and its high level of concentration have been analyzed by a significant number of empirical studies collected by the accounting research literature (Zeff and Fossum, 1967;Rhode, Whitsell and Kelsey, 1974;Danos and Eichenseher, 1986;Moizer and Turley, 1987;Beattie and Fearnley, 1994;Wolk, Michelson and Wootton, 2001;Thavapalan, Moroney, and Simnett, 2002;Beattie, Goodacre and Fearnley, 2003;Carrera, Gutierrez and Carmona, 2005;Feldman, 2006;McMeeking, Peasnell and Pope, 2007;McMeeking, 2007;García Benau and Novejarque, 2009;Caban-García and Cammack (2009) ;Kallapur, Sankaraguruswamy and Zang, 2010;Dunn, Kohlbeck and Mayhew, 2011). The high level of concentration in the market for financial audit services has caused a negative impact, on the world professional practices, which are currently evident and affect the very essence of the professional practice of financial audit services.…”

Professional financial and accounting services in the light of European Union directives and the deregulation of professions in Poland – current status and research needs

“…Some services rendered to taxpayers, such as, for instance, providing advice, opinions and explanations in the scope of taxes, customs duties, administrative enforcement matters relating to these duties, keeping booking, tax and other records, preparing tax returns and providing assistance in this regard will be almost completely deregulated. McMeeking et al, 2007), the concentration of the auditing market (Basioudis, Ellwood 2005) internal work processes and systems for the management and control of audit firms (Pierce, Sweeney 2004). Researchers explain the lack of significant observed changes in the strategy of service providers by high demand for accounting services currently delivered (Tabone, Baldacchino 2003;Chung, Narasimhan 2001) and by oligopolistic behaviours of audit firms, such as collusions or imitations (Moizer, Turley 1989).…”