An Examination of the Relation between Market Structure and the Profitability of Audit Engagements

33 Pages Posted: 3 Sep 2015

See all articles by Will Ciconte

Will Ciconte

University of Illinois at Urbana-Champaign - Department of Accountancy; University of Florida - Fisher School of Accounting

W. Robert Knechel

University of Florida - Fisher School of Accounting

Caren Schelleman

Maastricht University - Department of Accounting & Information Management, MARC (Maastricht Accounting, Auditing & Information Management Research Center)

Date Written: September 2015

Abstract

Due to increasing supplier concentration, there is growing concern regarding the lack of competition in the audit market. Theory based on Cournot oligopoly predicts that increasing concentration will facilitate monopolistic behaviour. Conversely, if the market for audit services has more in common with a Bertrand oligopoly, concentration may not lead to higher fees. We evaluate whether increased audit supplier concentration leads to economic rents by investigating audit profitability. Using proprietary data from a (then) Big 6 audit firm, we find that local market structure has a significant and positive association with audit profitability, but not auditor effort for large clients.

Keywords: Audit services, Audit fees, Audit effort, Audit engagement profitability, Audit markets

Suggested Citation

Ciconte, Will and Knechel, W. Robert and Schelleman, Caren, An Examination of the Relation between Market Structure and the Profitability of Audit Engagements (September 2015). Accounting & Finance, Vol. 55, Issue 3, pp. 749-781, 2015, Available at SSRN: https://ssrn.com/abstract=2655188 or http://dx.doi.org/10.1111/acfi.12078

Will Ciconte (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

University of Florida - Fisher School of Accounting ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

W. Robert Knechel

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

Caren Schelleman

Maastricht University - Department of Accounting & Information Management, MARC (Maastricht Accounting, Auditing & Information Management Research Center) ( email )

PO Box 616
Maastricht, 6200 MD
Netherlands

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