Spatial Competition in Local Audit Markets and the Fall-Out on Deloitte from the 2007 PCAOB Censure

Posted: 24 Sep 2016 Last revised: 10 May 2017

See all articles by Jeff P. Boone

Jeff P. Boone

University of Texas at San Antonio - Department of Accounting

Inder K. Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

K. K. Raman

The University of Texas at San Antonio

Date Written: September 23, 2016

Abstract

We examine whether Deloitte's spatial location in local audit markets affected the firm's adverse fall-out - in terms of decreased ability to retain new clients and maintain audit fees - from the 2007 PCAOB censure. We motivate our inquiry by the notion that auditor-client alignment and auditor-closest competitor distance can help differentiate the incumbent Big 4 auditor from other Big 4 auditors and thus provide market power, i.e., inhibit clients from shopping for another supplier because of the lack of a similar Big 4 provider in the local audit market. Consequently, it seems reasonable that the increase in switching risk and loss of fee growth suffered by Deloitte following the 2007 PCAOB censure will be lower in local markets where Deloitte was the market leader and its market-share distance from its closest competitor was greater. Our findings suggest that the decline in Deloitte’s audit fee growth rate following the 2007 PCAOB censure was concentrated in the pharmaceutical industry, although the client loss rate appears to have occurred more broadly (across all cities and industries). Collectively, our findings suggest that audit quality issues override auditor market power, i.e., differentiation does not provide Big 4 firms market power in the face of adverse regulatory action.

Keywords: PCAOB, Big 4 auditors, Local audit markets, Spatial competition

JEL Classification: G18; L51; M42; M49

Suggested Citation

Boone, Jeff P. and Khurana, Inder and Raman, K. K., Spatial Competition in Local Audit Markets and the Fall-Out on Deloitte from the 2007 PCAOB Censure (September 23, 2016). Auditing: A Journal of Practice & Theory, (May 2017), 36(2): 1-20.. Available at SSRN: https://ssrn.com/abstract=2842819

Jeff P. Boone

University of Texas at San Antonio - Department of Accounting ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Inder Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-882-3474 (Phone)
573-882-2437 (Fax)

K. K. Raman (Contact Author)

The University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8749 (Phone)

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