Office-Client Balance and Metro Area Audit Market Competition
67 Pages Posted: 5 Jan 2014 Last revised: 7 Aug 2018
Date Written: July 31, 2018
Based upon Porter’s (1979) competition framework, we propose a new competition construct: the Office-Client Balance (OCB), which consists of the relative abundance of suppliers (competing audit offices) and customers (audit clients) in a metro area. From this construct we derive a metro-level audit competition proxy reflecting deviations (imbalances) from the national metro OCB norm: the OCB Residual. We calculate this measure respectively for total audit offices, Big 4 audit offices, Second Tier audit offices, and Small audit offices. We first use audit fee analyses to validate the OCB Residual as a proxy for audit market competition. We then document the effects of audit market competition, proxied by the OCB Residual, in explaining choice of local (versus remote) audit offices, choice of Big 4 (versus non-Big 4) audit offices, and corrected misstatements as a proxy for audit quality. In all analyses we compare the results obtained using OCB Residuals as proxies for competition with the results using the Herfindahl Index (Herf), the most commonly used proxy for audit market competition. We find that OCB Residuals are more reliable measures for competition than Herf, and we discuss possible reasons for the OCB Residual advantage. Our study contributes to the literature on audit market structure and competition.
Keywords: metro area, client auditor choice, Big 4, audit fees, audit quality, audit market competition, concentration, competition
JEL Classification: G18; L10; M42
Suggested Citation: Suggested Citation