An Examination of the Impact of Audit Market Concentration on Audit Fees through the Prism of Auditors’ Efficiency

51 Pages Posted: 16 Jan 2018 Last revised: 13 Aug 2021

See all articles by Ping Zhang

Ping Zhang

University of Toronto - Rotman School of Management

Minlei Ye

University of Toronto

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Ling Chu

Wilfrid Laurier University

Date Written: August 10, 2021

Abstract

The extant auditing literature documents an inconsistent relationship between audit fees and market concentration. In this paper, we argue that the impact of market concentration on audit fees is auditor and auditee specific. Based on the fact that the audit services to an auditee are generally provided in their entirety by one auditor, we conjecture that the competition for an engagement is essentially based on costs (i.e., Bertrand competition) and that larger auditors are more efficient. Accordingly, we develop an audit fee determination framework that predicts that the disparity in sizes of the largest and the second-largest auditors result in differential audit fees charged by the largest auditor and other auditors. Since the concentration of an audit market is inherently associated with the size disparity in the market, our fee determination framework suggests that market concentration does not affect audit fees uniformly. Indeed, we document that market concentration increases the audit fees to auditees (in particular the large auditees) serviced by the largest auditor in a market and decreases the audit fees to all auditees serviced by other auditors. The results are consistent with our theory and explain the inconsistent empirical relationship between concentration and audit fees documented in the literature.

Keywords: Market concentration, audit market competition, auditor efficiency, auditor-auditee

JEL Classification: M42

Suggested Citation

Zhang, Ping and Ye, Minlei and Simunic, Dan A. and Chu, Ling, An Examination of the Impact of Audit Market Concentration on Audit Fees through the Prism of Auditors’ Efficiency (August 10, 2021). 2018 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=3103266 or http://dx.doi.org/10.2139/ssrn.3103266

Ping Zhang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Minlei Ye (Contact Author)

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

Ling Chu

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5
Canada

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