Does Audit Market Concentration and Legal Regime Matter in Audit Pricing? Theory and International Evidence
56 Pages Posted: 14 Jun 2017 Last revised: 8 Jul 2019
Date Written: June 2019
Following large-scale auditor consolidations in the late 1980s and early 1990s, along with Arthur Andersen’s collapse in 2001, the global audit market has become highly concentrated during the past 30 years. Many interested parties, including regulators, researchers, and practitioners, disagree on whether concentration would benefit or harm the audit market. To address this unresolved issue, we consider the role of legal regime in shaping the auditors’ incentives. Specifically, we first develop a model in which legal regime plays a significant role in explaining the effect of audit market concentration on audit fees. Our model predicts that, as the audit market becomes more concentrated, auditors charge higher audit fees in countries with a weak legal regime, but charge lower fees in countries with a strong legal regime. The empirical results with data from 27 countries support the model’s predictions. These findings provide regulators and other stakeholders with important insights into the consequences of audit market structure.
Keywords: Audit Market Concentration; Audit Fees; Legal Regime
JEL Classification: K42; L11; M42
Suggested Citation: Suggested Citation