The Effect of Private-Company Auditors and PCAOB-Registered Firms on Audit Market Competition

• In Event: Audit Market Competition & Audit Location

Abstract

Using a unique dataset containing all audit offices of all audit firms in the U.S., I analyze the effect of potential entrants – similarly sized, local audit firm offices that have no public clients – on the quality and pricing of public-company audits. I find that an increase in the group of potential entrants most likely to enter the public-company audit market (those firms registered with the Public Company Accounting Oversight Board but not auditing public clients) is associated with an increase in audit quality as measured by restatements and is also associated with a decrease in public-company audit fees. I also find that an increase in potential entrants is associated with a decreased likelihood of a client selecting its auditor to provide non-audit services. The pattern of results suggests potential entrants shift incumbent auditors’ pricing and quality closer to competitive equilibrium. This result is important for regulators as they consider measures to increase competition in the public-company audit market.

Author

• Devin Williams, University of Illinois