Office-Client Balance and Metro Area Audit Market Competition

57 Pages Posted: 5 Jan 2014 Last revised: 17 Jun 2020

See all articles by Michael Ettredge

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Matthew Sherwood

University of Massachusetts Amherst - Isenberg School of Management

Lili Sun

University of North Texas - Department of Accounting

Date Written: June 16, 2020

Abstract

We propose a new audit supplier competition construct: the Office-Client Balance (OCB), which consists of the relative abundance of suppliers (competing audit offices) and customers (audit clients) in a metropolitan (metro) area. From this construct, we derive a metro-level audit competition proxy reflecting surpluses or shortfalls of total metro audit office numbers relative to the national metro OCB norm: the OCB_TOT. Consistent with the predictions of Porter’s Five Forces theory, we find that this OCB competition variable is associated with lower fees, more auditor turnover, and more (less) office exits (entrances) in metro audit markets. These findings validate the OCB competition variable as a proxy for audit market competition. We then employ OCB_TOT to test a hypothesis about the relation between OCB competition and audit quality. Results indicate that greater metro-level competition among auditors (more positive OCB_TOT) is associated with higher audit quality, proxied by fewer instances of financial statement misstatements. Several additional analyses suggest that OCB_TOT is useful in explaining clients’ choices of local (versus remote) audit offices and Big 4 (versus non-Big4) offices.

Keywords: metro area, client auditor choice, Big 4, audit fees, audit quality, audit market competition, concentration, competition

JEL Classification: G18; L10; M42

Suggested Citation

Ettredge, Michael L. and Sherwood, Matthew and Sun, Lili, Office-Client Balance and Metro Area Audit Market Competition (June 16, 2020). Available at SSRN: https://ssrn.com/abstract=2374377 or http://dx.doi.org/10.2139/ssrn.2374377

Michael L. Ettredge (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Matthew Sherwood

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Lili Sun

University of North Texas - Department of Accounting ( email )

1155 Union Circle #305219
Denton, TX 76203-5017
United States
940-565-3077 (Phone)

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