The Effects of Audit Market Concentration and Auditor Reputation on Audit Quality: Evidence from Government Auditors

51 Pages Posted: 12 Jul 2018 Last revised: 27 Mar 2019

See all articles by Johnathon Cziffra

Johnathon Cziffra

HEC Montréal

Steve Fortin

University of Waterloo - School of Accounting and Finance

Zvi Singer

HEC Montreal

Date Written: March 17, 2019

Abstract

We investigate how a high degree of audit market concentration and auditor reputation affect audit quality. Using audit adjustments to student loan loss provisions in government audits to construct a new measure for excessive audit conservatism, we show that an audit market monopoly leads to excessively conservative audit adjustments to the provisions and, thus, to lower audit quality. We also examine the effect of a positive shock to auditor reputation on audit quality. We find that before the increase to their reputation, monopolistic auditors require more conservative, yet not excessively conservative, adjustments than auditors in a competitive market. However, after the reputation increase, the adjustments become excessively conservative. This result suggests that the combination of enhanced audit market concentration and high auditor reputation leads to excessive auditor conservatism. Consistent with the excessive nature of the adjustments, we find no significant association between the adjustments and future student loan write-offs. Additional analysis reveals that career concerns play a role in driving the excessive conservatism. Our study has implications for the ongoing debate regarding the impact of reduced competition in the audit market on audit quality and for the government.

Keywords: Audit market concentration, excessive conservatism, government audit, auditor reputation, monopoly

JEL Classification: H81, L13, L51, M41, M42, M48

Suggested Citation

Cziffra, Johnathon and Fortin, Steve and Singer, Zvi, The Effects of Audit Market Concentration and Auditor Reputation on Audit Quality: Evidence from Government Auditors (March 17, 2019). 2019 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=3202959 or http://dx.doi.org/10.2139/ssrn.3202959

Johnathon Cziffra

HEC Montréal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
514 340-3678 (Phone)

Steve Fortin

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Zvi Singer (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
514-340-1847 (Phone)

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