Does Audit Market Concentration Harm the Quality of Audited Earnings? Evidence from Audit Markets in 42 Countries

Posted: 12 Jan 2012 Last revised: 11 Sep 2013

See all articles by Jere R. Francis

Jere R. Francis

Maastricht University

Paul N. Michas

University of Arizona - Eller College of Management

Scott Seavey

Florida Atlantic University - School of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: December 15, 2011

Abstract

Audit regulators around the world have expressed concern over market dominance by Big 4 accounting firms and the potential adverse effect it may have on the quality of audited financial statements. We use cross-country variation in the audit market structure of 42 countries to examine two separate aspects of Big 4 dominance: (1) Big 4 market concentration as a group relative to non-Big 4 auditors; and (2) concentration within the Big 4 group in which one or more of the Big 4 firms is dominant relative to the other Big 4 firms. We find that in countries where the Big 4 (as a group) conduct more listed company audits, both Big 4 and non-Big 4 clients have higher quality audited earnings compared to clients in countries with smaller Big 4 market shares. In contrast, in countries where there is a greater concentration within the Big 4 group, we find that Big 4 clients have lower quality audited earnings compared to countries with more evenly distributed market shares among the Big 4. Thus concentration within the Big 4 group appears to be detrimental to audit quality in a country and of legitimate concern to regulators and policymakers. However, Big 4 dominance per se does not appear to harm audit quality and is in fact associated with higher earnings quality, after controlling for other country characteristics that potentially affect earnings quality.

Keywords: Audit Markets, Market Concentration, Big 4 Accounting Firms, Earnings Quality

JEL Classification: L84, M41, M49

Suggested Citation

Francis, Jere R. and Michas, Paul N. and Seavey, Scott, Does Audit Market Concentration Harm the Quality of Audited Earnings? Evidence from Audit Markets in 42 Countries (December 15, 2011). Contemporary Accounting Research (2013) Vol. 30 (1): 325-355. Available at SSRN: https://ssrn.com/abstract=1973145

Jere R. Francis

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Paul N. Michas (Contact Author)

University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States

Scott Seavey

Florida Atlantic University - School of Accounting ( email )

University Tower
220 SE 2 Avenue
Boca Raton, FL 33431
United States

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