Lucky Or Good? Audit Market Concentration And The Emergence of The Big 4 In Australia

67 Pages Posted: 2 May 2014 Last revised: 31 Aug 2020

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 and Business Information Systems

Douglas J. Skinner

The University of Chicago - Booth School of Business

Date Written: August 1, 2020

Abstract

We use a long time-series from Australia to investigate the determinants and (to a lesser extent) consequences of audit market concentration. We show that increasing skewness in the size of public companies is associated with increased audit market concentration, and that the growth of the large audit firms is largely due increases in the size of a small number of their public company clients rather than to mergers and acquisitions. Our evidence also shows that a simple growth/economies of scale argument cannot fully explain market concentration: median audit firm size, a common measure of minimum efficient scale, is flat to declining as the size of the market increases. The emergence of the Big N is also associated with a number of differences (relative to non-Big N firms) that occur around the time the profession first allowed audit firms to advertise and promote their services. These differences include increases in staff-to-partner ratios, lower ratios of audit fees to client assets, industry specialization, and growth in the provision of nonaudit services, all of which suggests that Big N firms made sunk cost investments that helped them to differentiate their services and expand. We also show that the change in regulation of advertising led to increased client switching and realignment. We find no evidence that the audit market became less competitive as concentration increased; for example, audit fees decline for both Big N and non-Big N firms during economic downturns. While largely descriptive, our evidence offers important new insights into what led to audit market concentration and the differentiating characteristics of Big N firms.

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., Lucky Or Good? Audit Market Concentration And The Emergence of The Big 4 In Australia (August 1, 2020). 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 and Business Information Systems ( 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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