An Experimental-Market Exploration of High-Quality Auditors and Managerial Preference for Audit Quality

• In Event: Audit Quality

Abstract

This paper examines the impact of including a public option (PO) auditor, who is committed to providing high-quality assurance, on experimental audit markets. We build on prior literature examining auditor reputational effects in such markets. The current research is exploratory and is the first to examine a market with an auditor that is guaranteed to provide high-quality assurance services. This allows us to investigate manager preference for audit quality as well. The research is motivated by commentators concerns that the current auditing market has become overly concentrated and that Big4 firms are “too-big-to-fail.”

The results provide strong evidence that, contrary to game theoretic predictions, the PO auditor does not dominate the market and, in a majority of markets, struggles to attain an equal market share with other non-PO auditors. Further, while including a PO auditor does not noticeably improve market outcomes, it also does not worsen market outcomes. Our results indicate that, while investors consistently and reliably reward managers who employ the PO auditor, managers do not consistently demand high-quality auditing.

Authors

• Patrick Joseph Hurley, University of Wisconsin–Madison

• Brian Mayhew, University of Wisconsin–Madison