Struggle over Joint Audit: On Behalf of Public Interest?

• In Event: Multiple Auditor Engagements

Abstract

This paper studies the claimed costs and benefits of joint audit that has recently been suggested by the European Commission (EC 2011) as a way to decrease the audit market concentration. This initiative has raised a vivid debate between the Big and the 2nd Tier audit firms. While both groups claim acting on behalf of public interest protection, the former fight the proposal by arguing its unbearable cost while the latter support it by arguing its added quality. These conflicting positions lead us to question their claim of public interest concern. As group-interest economic regulation theories predict that the absence of any effect of a new regulation (here: joint audit) is an evidence of a group rather than a public-interest concern, we test both cost and quality arguments.
We perform our analysis on Denmark (2002-2010), which gave up the mandatory joint audit in 2005. We test the consequences on the big4 domination and the impact of joint audit on both audit costs surrogated by audit fees or total fees and audit quality surrogated by abnormal accruals. Our results show 1) the positive association between joint audit and audit fees but not between joint audit and total fees, and 2) the non-significant association between joint audit and abnormal accruals. As given the partial non-significance of the hypothesized positive association between joint audit and audit cost or quality, we conclude that arguments raised by both parties relate more to the defense of their private interest than the public (firms’ or shareholders’) interests. The results are of interest for regulators and actors in the audit market.

Authors

• Cedric Lesage, HEC Paris

• Nicole V.S. Ratzinger-Sakel, Universitat Ulm

• Kettunen Jaana, University of Jyväskylä