Is Audit Market Concentration Really A Bad Thing? Evidence on Audit Fees and Audit Quality from China

• In Event: Auditing I

Abstract

Global regulators and practitioners have expressed concerns about the potential harm to audit quality caused by a more concentrated audit market. In contrast, the Chinese government recently proposed several mechanisms, which may lead to increased audit market concentration, with the stated aim of improving audit quality. Given the different attitudes toward audit market concentration and the mixed evidence in extant studies, we investigate the effects of audit market concentration on audit fees and audit quality in China, where the audit market is competitive and the legal environment is relatively weak. Unlike previous studies, we examine both audit fees and audit quality, and explicitly explore the indirect influence of audit market concentration on audit quality through audit fees. We use a large sample of 12,334 firm-year observations for the period 2001 to 2011, and find that audit market concentration is significantly and positively related to audit fees. Furthermore, path analysis shows that audit market concentration improves earnings quality through increased audit fees. Finally, we find that audit market concentration has an insignificant overall effect on audit opinion, but has a significantly negative indirect effect on the propensity for the auditor to issue modified audit opinion through increased audit fees and improved earnings quality. This paper contributes to the recent debate on audit market concentration and provides valuable evidence to both the Chinese government and global regulators.

Authors

• Ting-Chiao Huang, National Cheng Kung University

• Jeng-Ren Chiou, National Cheng Kung University