Supply of Metro Area Audit Providers and Audit Market Outcomes

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

Abstract

This study develops new variables capturing a previously unexamined aspect of audit market structure at the metropolitan (metro) level. Our new metrics capture metro area audit office supply in relation to metro area audit demand, and relative to national metro norms. The metro level variables are calculated respectively for total audit offices, Big 4 audit offices, Second Tier audit offices, and Small audit offices. We find that the abnormal audit office supply variables are incrementally useful in explaining auditor choice, specifically choice of local (versus remote) auditors, and choice of Big 4 (versus non-Big 4) auditors., after controlling for the Herfindahl index capturing audit market concentration and other relevant factors. Further, a greater level of abnormal audit office supply at the metro level is associated with lower audit fees and lower likelihood of misstatements for individual clients. Our study contributes to the modestly sized literature on audit market structure and enhances our knowledge of determinants of auditor affiliations, audit fees, and audit quality. The study also adds to the scarce evidence on characteristics of U.S. metro auditor bases, and their relation with metro client bases.

Authors

• Michael Ettredge, The University of Kansas

• Matthew Sherwood, The University of Kansas

• Lili Sun, University of North Texas