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The Auditing Oligopoly and Lobbying on Accounting Standards

58 Pages Posted: 11 Dec 2012 Last revised: 22 Aug 2013

Abigail M. Allen

Brigham Young University - Marriott School; Harvard University - Accounting & Control Unit

Karthik Ramanna

Harvard University - Harvard Business School; University of Oxford - Blavatnik School of Government

Sugata Roychowdhury

Boston College

Date Written: August 19, 2013

Abstract

We examine how the tightening of the U.S. auditing oligopoly over the last twenty-five years — from the Big 8 to the Big 6, the Big 5, and, then, the Big 4 — has affected the incentives of the Big N, as manifest in their lobbying preferences on accounting standards. We find, as the oligopoly has tightened, Big N auditors are more likely to express concerns about decreased “reliability” in FASB-proposed accounting standards (relative to an independent benchmark); this finding is robust to controls for various alternative explanations. The results are consistent with the Big N auditors facing greater political and litigation costs attributable to their increased visibility from tightening oligopoly and with decreased competitive pressure among the Big N to satisfy client preferences (who, relative to auditors, favor accounting flexibility over reliability). The results are inconsistent with the claim that the Big N increasingly consider themselves “too big to fail” as the audit oligopoly tightens.

Suggested Citation

Allen, Abigail M. and Ramanna, Karthik and Roychowdhury, Sugata, The Auditing Oligopoly and Lobbying on Accounting Standards (August 19, 2013). Harvard Business School Accounting & Management Unit Working Paper No. 13-054. Available at SSRN: https://ssrn.com/abstract=2187947 or http://dx.doi.org/10.2139/ssrn.2187947

Abigail M. Allen

Brigham Young University - Marriott School ( email )

Provo, UT
United States

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

Karthik Ramanna (Contact Author)

Harvard University - Harvard Business School ( email )

Boston, MA 02163
United States

University of Oxford - Blavatnik School of Government ( email )

10 Merton St
Oxford, Oxfordshire OX1 4JJ
United Kingdom

Sugata Roychowdhury

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-1764 (Phone)

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