Banks and Their Big 4 Auditors: Competition Where Art Thou?

• In Event: Mixed Methodologies

Abstract

In this study we investigate whether there is competition between the Big 4 audit suppliers in the market segment of financial services clients. Prior studies on auditor competition in other industry segments of the market does not report a lack of competition in the audit market, but on average supports the notion that audit services are price competitive but that price premiums can be earned when an auditor is able to differentiate itself from its (close) competitors through industry specialization (Simunic 2014). However, due to their larger complexity financial sector clients have less choice from potentially alternative suppliers than clients from other industries. We argue that the high transaction (switching) costs in the financial sector segment of the audit market induce lower competition among Big 4 suppliers in that sector (Klemperer 1987; Gigler & Penno 1995; Taylor 2003). We test this conjecture using two kinds of competition tests. First, we use a traditional test of the association between audit pricing and proxies of Big 4 auditor competition that were used in previous audit literature (i.e. the Herfindhal index and pressure from the closest competitor). We find no significant association between these competition proxies and audit pricing – indicating that competitive pressure (or the lack thereof) does not affect pricing. Second, we use a market share mobility test (Dekeyser et al. 2015) which assesses whether the market shares of audit firms in the financial sector are ‘sticky’ and change less over time than in other audit industry segments, and we find that this is the case. Overall the evidence we present is consistent with a lower level of competition among Big 4 auditors in the audit market segment of financial sector clients.

Authors

• Ines Simac, KU Leuven

• Simon Dekeyser, KU Leuven

• Marleen Willekens, KU Leuven