Focused (Factory) Auditing as a Competitive Strategy for Small Auditors in the NB4 Market: Evidence for the Commercial Banking Industry

• In Event: Audit Markets 2

Abstract

The objective of this study is to investigate how small audit firms can compete in the Non-Big 4 segment of the audit market. According to the strategic management literature, small firms can survive in a market dominated by large players if they pursue a niche strategy (e.g., Caves and Porter 1977). In this study, we are interested in accounting firms with a “single-industry” niche strategy and refer to these audit firms as focused auditors. An exploratory analysis of the audit market shows that particularly in the banking sector, focused audit firms have a significant presence. For that reason, we use banks as our sample. The empirical results confirm our first hypothesis – that focused auditors are associated with higher audit quality, which translates as lower abnormal loan loss provision accruals. Our second hypothesis is that greater efficiencies allow focused auditors to offer fee discounts, and our audit fee analysis confirms this, even in the case of clients with relatively little bargaining power. We conclude that occupying an industry niche could constitute a key strategy for small auditors seeking to compete in the Non-Big 4 market segment by offering a differentiated product at competitive prices.

Authors

• Ines Simac, KU Leuven

• Marleen Willekens, KU Leuven