The Effects of Competition on Audit Fees

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 1: Determinants of Audit Fees

Abstract

Regulators around the world have expressed concern over the alleged high level of concentration in the market for audit services. They infer this conclusion from the high market dominance by Big Four audit firms. However, there are both theoretical and empirical problems with the idea that more concentrated markets are necessarily less competitive. Instead of analyzing solely the relationship between concentration and price, we examine the effect of different competition measures. Following Numan and Willekens (2012) exploring the US audit market, we first examine the effect of ‘distance’ between competing auditors, in terms of industry market share difference. We further elaborate the competition measure by introducing a new variable to capture the conditional effect of similarity in competitive strategy on the relationship between market share distance and audit fees. Our results - based on a sample of 11,658 Belgian companies - indeed provide an indication that the level of competition is higher and audit fees are lower when both the incumbent auditor and its closest competitor apply a similar competitive strategy to attain a comparable level of market share.

Authors

• Jan De Muylder, Vrije Universiteit Brussel

• Kris Hardies, Universiteit Antwerpen

• Diane Breesch, Vrije Universiteit Brussel