The Existence and Effect of Competition in the Audit Market: Evidence from the Bidding Process

44 Pages Posted: 23 Feb 2018 Last revised: 27 Oct 2018

See all articles by Nicholas Hallman

Nicholas Hallman

University of Texas at Austin

Antonis Kartapanis

The University of Texas at Austin

Jaime J. Schmidt

University of Texas at Austin

Date Written: October 26, 2018

Abstract

Prior research provides mixed evidence on whether sufficient audit market competition exists and whether competition impairs or improves audit quality. A major impediment of the prior literature has been the inability of researchers to observe the competitive bidding process. In this study, we use non-incumbent (i.e., competitor) auditor views of public company SEC filings to measure the competitive bidding process. We first validate that our measure of bidding captures competition by documenting that competitor auditors’ views of companies’ SEC filings significantly increase during the three months prior to an auditor change announcement. We then investigate the determinants of competitive bidding and the effect of competitive bidding on audit quality and fees. Consistent with concerns that market concentration impedes competition, we document that less bidding occurs in industry-concentrated markets and when incumbent auditors are either industry market share leaders or have a longer tenure with the client. However, contrary to conclusions in the prior literature, we find no evidence that local market concentration is associated with competitive bidding. We also find that, inconsistent with concerns that competitive pressure causes auditors to placate managers, competitive bidding is associated with an improvement in audit quality by incumbent auditors, as measured by the likelihood to subsequently restate the financial statements. Finally, as expected, we find that competitive bidding is associated with a subsequent reduction in audit fees.

Keywords: auditor competition, audit market concentration, audit quality, audit fees

Suggested Citation

Hallman, Nicholas and Kartapanis, Antonis and Schmidt, Jaime J., The Existence and Effect of Competition in the Audit Market: Evidence from the Bidding Process (October 26, 2018). Available at SSRN: https://ssrn.com/abstract=3124722 or http://dx.doi.org/10.2139/ssrn.3124722

Nicholas Hallman

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Antonis Kartapanis

The University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Jaime J. Schmidt (Contact Author)

University of Texas at Austin ( email )

Austin, TX 78712
United States

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