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

See all articles by Jong-Hag Choi

Jong-Hag Choi

Seoul National University - College of Business Administration

Eunhee Kim

City University of Hong Kong (CityUHK)

Jeong-Bon Kim

City University of Hong Kong

Eugenia Y. Lee

Seoul National University

Hee-Yeon Sunwoo

Seoul National University

Date Written: June 2019

Abstract

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

Choi, Jong and Kim, Eunhee and Kim, Jeong-Bon and Lee, Eugenia and Sunwoo, Hee-Yeon, Does Audit Market Concentration and Legal Regime Matter in Audit Pricing? Theory and International Evidence (June 2019). Available at SSRN: https://ssrn.com/abstract=2985877 or http://dx.doi.org/10.2139/ssrn.2985877

Jong Choi

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Eunhee Kim

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Eugenia Lee (Contact Author)

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Hee-Yeon Sunwoo

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

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