The Impact of Market Structure on Audit Price and Quality

49 Pages Posted: 30 Apr 2013

See all articles by Kimberly Dunn

Kimberly Dunn

Florida Atlantic University - School of Accounting

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Brian W. Mayhew

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: April 29, 2013

Abstract

We examine the association between U.S. audit market structure and both audit price and quality. The significant consolidation of the largest audit firms and its effect on market structure has raised international concern among policy makers. We address this concern by examining the association between equality of Big4 market shares at the U.S. national-industry level and both audit fees and audit quality. Our results suggest that greater national-industry Big4 market equality is associated with lower audit fees and higher audit quality measured by client restatements. We extend the analysis to the city level and find equality associated with higher fees but little association with quality. We incorporate market concentration as another measure of market structure and find equality better captures the association between market structure and audit fees. National-industry equality also continues to be positively associated with quality despite a significant association between city level concentration and quality. Our results suggest that the equality of audit firm market shares is associated with important market outcomes even in the highly concentrated audit market, and that alternative levels of market aggregation such as the national-industry and city levels provide different insights into the effects of market structure.

Keywords: Market Structure, Audit Fees, Audit Quality, Auditor Market Share Equality

JEL Classification: M4, L11

Suggested Citation

Dunn, Kimberly A. and Kohlbeck, Mark J. and Mayhew, Brian W., The Impact of Market Structure on Audit Price and Quality (April 29, 2013). Available at SSRN: https://ssrn.com/abstract=2258091 or http://dx.doi.org/10.2139/ssrn.2258091

Kimberly A. Dunn

Florida Atlantic University - School of Accounting ( email )

University Tower
220 SE 2 Avenue
Boca Raton, FL 33431
United States
561-297-3643 (Phone)

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

Brian W. Mayhew (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-2714 (Phone)
608-263-0477 (Fax)

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