Audit Market Structure and Audit Pricing

Posted: 30 Sep 2016

See all articles by John Daniel Eshleman

John Daniel Eshleman

Rutgers - Camden

Bradley Lawson

Oklahoma State University - Stillwater - School of Accounting

Date Written: September 1, 2016

Abstract

Extant literature finds mixed evidence on the association between audit market concentration and audit fees. We re-examine this issue using a large sample of U.S. audit clients covering 90 Metropolitan Statistical Areas (MSAs) spanning 2000-2013. We find that audit market concentration is associated with significantly higher audit fees, consistent with the concerns of regulators and managers. We also find that increases in audit market concentration are associated with fewer initial engagement fee discounts (i.e., reduced lowballing), particularly for non-Big 4 clients. We reconcile our findings with those of prior research and find that our divergent findings are attributable to controls for MSA fixed effects. In supplemental analyses, we find that audit market concentration is associated with higher audit quality. We also find that concentration is associated with higher audit quality for first-year engagements, but only if the auditor does not lowball on the engagement. Our results are relevant to the ongoing debate regarding the consequences of increased concentration within the U.S. audit market (GAO 2003, 2008).

Keywords: Audit pricing, Auditor switches, Audit market concentration, Lowballing

JEL Classification: M41, M42, L13

Suggested Citation

Eshleman, John Daniel and Lawson, Bradley, Audit Market Structure and Audit Pricing (September 1, 2016). Accounting Horizons, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2844802

John Daniel Eshleman

Rutgers - Camden ( email )

Camden, NJ 08102
United States

Bradley Lawson (Contact Author)

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
415 Business Building
Stillwater, OK 74078
United States

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