58 Pages Posted: 11 Dec 2012 Last revised: 22 Aug 2013
Date Written: August 19, 2013
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: 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