Auditor Size and Audit Quality Revisited: The Importance of Audit Technology

56 Pages Posted: 20 Oct 2010 Last revised: 16 Aug 2014

Louis-Philippe Sirois

Université Laval - École de comptabilité

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Date Written: July 1, 2011

Abstract

We revisit the notion of audit quality and investigate how audit quality is related to auditor size and the structure of the auditing industry. We discuss a model of audit firm competition where both audit quality and audit firm size are endogenous. Based on this model, we predict how certain market characteristics, namely market size and investor protection regime, affect the structure of the auditing industry and differences between Big 4 and non-Big 4 audit quality and fees. In the model, audit technology plays a central role in determining the level of audit quality and fees as Big 4 auditors compete on both quality and price through fixed investments in technology, the level of which is increasing in both market size and the level of investor protection. The model offers a coherent explanation for the documented ‘Big 4/non-Big 4 dichotomy’ and dual structure of the industry.

Our analysis has both testable empirical implications and policy implications. It provides insights on how audit firms compete and how the industry evolves, and suggests that despite high levels of market concentration, the market for audit services remains competitive and innovative, consistent with empirical evidence.

Keywords: Audit Quality, Big 4 Auditors, Big 4 fee Premium, Market Structure

JEL Classification: M42, D43, L11, L22, L84

Suggested Citation

Sirois, Louis-Philippe and Simunic, Dan A., Auditor Size and Audit Quality Revisited: The Importance of Audit Technology (July 1, 2011). Available at SSRN: https://ssrn.com/abstract=1694613 or http://dx.doi.org/10.2139/ssrn.1694613

Louis-Philippe Sirois (Contact Author)

Université Laval - École de comptabilité ( email )

Quebec City
Canada

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

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