Determinants of the Profitability of Audit Engagements: An Empirical Study

Posted: 31 Oct 2012

See all articles by Will Ciconte

Will Ciconte

University of Illinois at Urbana-Champaign - Department of Accountancy; University of Florida - Fisher School of Accounting

W. Robert Knechel

University of Florida - Fisher School of Accounting

Caren Schelleman

Maastricht University - Department of Accounting & Information Management, MARC (Maastricht Accounting, Auditing & Information Management Research Center)

Date Written: October 28, 2012

Abstract

This study reports the results of an investigation into the profitability of audit engagements. The study is motivated by the frequently expressed concern regarding the lack of competitiveness within the audit market, based on trends of increasing concentration of suppliers. Increasing concentration is thought to facilitate collusion and monopoly behavior, allowing firms to raise prices above cost. The current study investigates whether higher market concentration (share) allows firms to earn economic rents. A model for explaining audit engagement profitability is constructed and tested on a sample of 125 audit engagements conducted by a (then) Big 6 audit firm. The results show that local structure has a significant and positive association with audit engagement profitability. We conduct additional tests of the audit production process and find that market concentration does not significantly impact auditor effort. As a result, we provide evidence consistent with either the structuralist or efficiency explanations of the relationship between market concentration (share) and profitability, but that market concentration (share) does not result in lower auditor effort.

Keywords: audit services, audit engagement profitability, audit markets

Suggested Citation

Ciconte, Will and Knechel, W. Robert and Schelleman, Caren, Determinants of the Profitability of Audit Engagements: An Empirical Study (October 28, 2012). Available at SSRN: https://ssrn.com/abstract=2169015

Will Ciconte

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

University of Florida - Fisher School of Accounting ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

W. Robert Knechel (Contact Author)

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

Caren Schelleman

Maastricht University - Department of Accounting & Information Management, MARC (Maastricht Accounting, Auditing & Information Management Research Center) ( email )

PO Box 616
Maastricht, 6200 MD
Netherlands

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