Audit Market Concentration, Audit Pricing and Audit Reporting: Evidence from China

• In Event: Auditing I (100 mins)
  In Paper Session: Auditing

Abstract

This study examines the effect of market concentration on audit fees and auditor reporting in China. While Chinese audit market is highly competitive at the national level, there is a considerable variation in market concentration across provincial jurisdictions. This institutional characteristic provides a good setting for us to test the impact of different market concentration on audit pricing and audit quality in a single country. Our empirical results show that regional market concentration is positively related to audit fees and negatively related to an auditor’ propensity to issue modified audit opinions. Moreover, we find that abnormal audit fees are positively associated with auditor reporting conservatism. As market concentration increases, this association is weakened. The results suggest that abnormal audit fees capture extra audit efforts in competitive markets; however, in highly concentrated markets, abnormally high audit fees may be linked to the excessive rents extracted by dominant auditors. This paper adds to current literature by studying the market dominated by Non-Big 4 auditors and provides evidence on how the audit fee - audit quality relationship varies with market concentration.

Authors

• Yingwen Guo, City University of Hong Kong

• Phyllis Mo, City University of Hong Kong