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Competition in the Audit Market: Policy Implications

70 Pages Posted: 18 Jul 2013 Last revised: 18 Apr 2015

Joseph J. Gerakos

Tuck School of Business at Dartmouth College

Chad Syverson

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: April 17, 2015

Abstract

The audit market's unique combination of features - its role in capital market transparency, mandated demand, and concentrated supply - means it receives considerable attention from policymakers. We explore the effects of two market scenarios that have been the focus of policy discussions: mandatory audit firm rotation and further supply concentration due to the exit of a "Big 4" audit firm. To do so, we first estimate publicly traded firms' demand for auditing services, allowing the services provided by each of the Big 4 to be differentiated products. We then use those estimates to calculate how each scenario would affect client firms consumer surplus. We estimate that, conservatively, mandatory audit firm rotation would induce consumer surplus losses of approximately $2.7 billion if rotation were required after ten years and $4.7-5.0 billion if after only four years. We find similarly that exit by one of the Big 4 would reduce client firms' surplus by $1.4-1.8 billion. These estimates reflect only the value of firms' lost options to hire the exiting audit firm; they do not include likely fee increases resulting from less competition among audit firms. The latter could result in audit fee increases between $0.75-1.3 billion per year for mandatory rotation and $0.47-0.58 billion per year for the disappearance of a Big 4 audit firm. Such losses are substantial; by comparison, total audit fees for public firms were $11 billion in 2010.

Keywords: Mandatory Rotation, Competition

JEL Classification: L84, M41, M42, M48

Suggested Citation

Gerakos, Joseph J. and Syverson, Chad, Competition in the Audit Market: Policy Implications (April 17, 2015). Chicago Booth Research Paper No. 13-63. Available at SSRN: https://ssrn.com/abstract=2294508 or http://dx.doi.org/10.2139/ssrn.2294508

Joseph J. Gerakos (Contact Author)

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

Chad Syverson

University of Chicago Booth School of Business ( email )

1126 East 59th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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