Joint Audit, Audit Market Structure, and Social Welfare

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 2: Joint Audits and Market Structure

Abstract

This paper investigates how introducing a joint audit requirement would
affect audit market structure and social welfare. We use a structural model
involving three steps. First, we identify the demand fundamentals for audit
service in a joint audit regime using data from France. Second, we validate
the derived estimates for the demand for individual auditors using data from a
single audit regime, namely the UK. Third, we use our estimates for both the
demand for individual auditors and pairs of auditors to simulate the effects of
introducing a joint audit requirement on the market structure in a single audit
regime. We find that medium-sized audit firms and small audit firms gain
market share at the expense of three of the Big Four audit firms. Interestingly,
the largest audit firm in the UK would be able to maintain its market share. Our
approach also enables us to measure welfare effects of the change. Joint audits
brings along the economic costs of forbidding firms to give all the audit work
to their most preferred audit firm. However, we also identify a novel benefit of
joint audits. We find that joint audit regimes has economic benefits of giving
firms the additional choice of picking the pair of auditors best suitable for their
situation. Overall, we find that the introduction of a joint audit regime would
be associated with a substantial welfare loss. Our study provides new empirical
evidence for evaluating current policy initiatives promoting joint audits.

Authors

• Qiang Guo, Universitat Mannheim

• Christopher Koch, University of Mainz

• Aiyong Zhu, University of Mannheim