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Auditors’ and Clients’ Bargaining Power in Light of the Current Debate on Audit Market Regulation

Sat, January 18, 7:30 to 8:30am, TBA

Abstract

Using a specifically-adjusted panel data set, this study examines auditors’ and clients’ bargaining power of a continuous auditor-client relationship in the German audit market for the 2005–2010 period in order to determine whether clients’ bargaining power is impaired. This study was initiated in response to a study published by the Competition Commission of the United Kingdom in spring 2013 which assumes that certain audit market features impair clients’ bargaining power, resulting in so-called adverse effects on competition. The results of our study show significant auditors’ bargaining power in the periods 2007/2006, 2009/2008 and 2010/2009 and significant clients’ bargaining power in the periods 2006/2005 and 2008/2007. Only in the 2007/2006 period was auditors’ bargaining power significantly greater than clients’ bargaining power. Overall, the results provide no evidence supporting the assumption that auditors’ bargaining power is greater than clients’ bargaining power. As such, we regard the Competition Commission’s conclusion that audit fees are uncompetitively high as questionable, at least for the German market. Our insights into the audit fee negotiation process can be used to inform regulatory decision-making and are valuable in particular considering the Competition Commission’s relevance for the current debate on audit market regulation in Europe.

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