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

65 Pages Posted: 2 May 2014 Last revised: 15 May 2023

See all articles by Colin Ferguson

Colin Ferguson

University of Melbourne - Faculty of Business and Economics (Deceased)

Matt Pinnuck

University of Melbourne - Department of Accounting

Douglas J. Skinner

The University of Chicago - Booth School of Business

Date Written: May 15, 2023

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

Suggested Citation

Ferguson, Colin and Pinnuck, Matthew and Skinner, Douglas J., Why Did the Big 4 Get So Large? Evidence from Australia (May 15, 2023). Chicago Booth Research Paper No. 14-13, Available at SSRN: https://ssrn.com/abstract=2431727 or http://dx.doi.org/10.2139/ssrn.2431727

Colin Ferguson

University of Melbourne - Faculty of Business and Economics (Deceased)

Matthew Pinnuck

University of Melbourne - Department of Accounting ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia

Douglas J. Skinner (Contact Author)

The University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7137 (Phone)

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