The Effect of Audit Market Structure Change on Audit Pricing: Evidence from China

• In Event: Audit Markets

Abstract

In 2013, audit firm mergers created two “Chinese” audit firms – Ruihua and BDO Lixin – that outranked EY and KPMG to become two of the four largest audit firms in China in terms of total audit revenue. In this study, we examine the impact of this change in audit market structure on the audit pricing behavior of these two large local audit firms – or Big L – relative to the Big 4 and other local audit firms. Using a difference-in-differences design, we find that the pre-post change in audit fees for the Big L auditors is significantly higher than that for the Big 4 and the other local audit firms around the mergers. Specifically, there was a significant decline in audit fees for clients of the Big 4 auditors around the mergers, while audit fees for both Big L auditors increased after the mergers. We also find a significantly higher pre-post change in audit fees charged by the Big L auditors relative to that of other local auditors around the mergers. We interpret the results as consistent with a shift in the relative market power among the large audit suppliers in China and the development of brand name reputations by the Big L firms in the post-merger period. This study answers calls by Francis (2011) and DeFond and Zhang (2014) for further research on the effects of changes in market structure in the audit industry. Implications for various regulators of the accounting profession are discussed.

Authors

• Lina Li, University of Auckland

• Steven F Cahan, The University of Auckland