Why Did the Big 4 Get So Large? Evidence from Australia

Abstract

We use a long time-series from Australia to shed light on economic factors that led to audit market concentration and the emergence of the Big N. We show that increases in the size of a relatively small number of public company clients (increased concentration in the corporate sector) was an important factor that led to large audit firms and audit market concentration. Related, we show that Big N firms made sunk cost investments that allowed them to differentiate their services, including by investing in the ability to offer expertise (such as industry specialization) and non-audit services, which allowed them to retain clients and grow as their clients became larger and more complex. These changes occurred around the time the profession lifted restrictions on advertising and promotion, which facilitated audit switching and allowed larger, more complex clients to switch to emerging Big N firms while smaller, less complex clients switched to non-Big N firms. We do not find evidence that audit market concentration led to reduced competition; instead, our results suggest the audit market became more competitive over time as concentration increased. 

Keywords: auditing, market concentration, Big 4, Big N

JEL Classification: L11, L51, M21, M42