AAA Spark Meeting of Regions

Audit Pricing and Composition of Local Audit Office

• In Event: Office and Employee Characteristics and Audit Quality

Abstract

In this study, we present a new perspective to explore the association between audit pricing and the local audit market structure, namely the availability of local Big 4 offices within an metro area. Audit market is suggested to be a bifurcated structure in which Big 4 auditors and non-Big 4 auditors are targeting different types of clients. We are motivated to investigate whether the availability of local Big 4 offices (relative to non-Big 4 offices) has a differential impact on the audit pricing of Big 4 audit clients versus non-Big4 clients.
Analyzing a large sample of U.S. audit clients from year 2000 to year 2018, we find that the availability of local Big 4 offices reduces the audit pricing of local clients. Further, we find that the impact of the availability of local Big 4 offices on Big 4 client audit pricing is much stronger than on other client audit pricing. These results suggest that the effect of the availability of local Big 4 offices on the audit pricing varies between Big 4 clients and non-Big 4 clients.
Our study addresses the competitive dynamics of local audit markets from a new perspective and attempts to explore the impact of the availability of local Big 4 offices on audit pricing for both Big 4 and non-Big 4 clients. Our results are relevant to the ongoing debate regarding the consequences of the U.S. audit market competition (GAO 2003, 2008).

Authors

• Xudong Li, Monmouth University

• Da Wu, Clark University