The Existence and Effect of Competition in the Audit Market: Evidence from the Bidding Process
46 Pages Posted: 23 Feb 2018 Last revised: 24 Jan 2019
Date Written: December 18, 2018
Prior research provides mixed evidence about whether sufficient audit market competition exists and whether competition impairs or improves audit quality. A major impediment of this stream of research is the unobservable nature of the bidding process by which auditors compete for clients. In this study, we use non-incumbent (i.e., competitor) auditor views of public companies’ SEC filings to measure competitive bidding and investigate its association with audit quality, audit pricing, and audit market concentration. 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. Then, inconsistent with concerns that competitive pressure causes auditors to placate managers, we find that competitive bidding is associated with an improvement in audit quality by incumbent auditors, as measured by the likelihood to subsequently restate the financial statements. We also find that competitive bidding constrains incumbent auditors’ ability to increase audit fees. Finally, consistent with concerns that market concentration impedes competition, we find that less bidding occurs in industry-concentrated markets. However, contrary to conclusions in the prior literature, we find no evidence that local market concentration is associated with competitive bidding.
Keywords: auditor competition, audit market concentration, audit quality, audit fees
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