Do Big 4 Audit Firms Around the World Approach Monopoly Pricing When Audit Market Concentration is High?

• In Event: Audit Markets

Abstract

Regulators around the world are concerned about the potentially harmful effects of high audit market concentration on audit quality and pricing. We contribute to this debate by arguing that the audit market is segmented and that concentration is most likely to lead to monopoly pricing in the Big 4 segment of the audit market. Accordingly, our analysis uses international data and focuses on concentration within the Big 4 group of firms in a country. We find that audit fees are increasing in our concentration measure. This effect is stronger for clients where the barriers to entry by competing auditors are likely higher, as proxied by international operations, IFRS use and client size. Finally, we find evidence that audit quality is decreasing in Big 4 market concentration. This combination of increased pricing and decreased service quality is consistent with monopoly pricing.

Authors

• Joshua Gunn, University of Pittsburgh

• Brett Shinji Kawada, San Diego State University

• Paul N Michas, University of Arizona-Tucson