Audit Market Concentration, Audit Fees, and Audit Quality: A Cross-Country Analysis of Complex Audit Clients

49 Pages Posted: 2 Oct 2019

See all articles by Joshua L. Gunn

Joshua L. Gunn

University of Pittsburgh - Katz Graduate School of Business

Brett Kawada

San Diego State University - Accountancy

Paul N. Michas

University of Arizona - Eller College of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 20, 2019

Abstract

Regulators around the world are concerned about the potentially harmful effects of high audit market concentration on audit pricing and quality. However, results in the overall literature have failed to reach consensus on this issue. We contribute to this debate by arguing that the audit market is segmented and that concentration in the Big 4 segment of the market leads to higher audit pricing. Accordingly, our analyses use international data and focus on concentration within the Big 4 group of firms in across countries. We find that audit fees are increasing in our concentration measure for clients where the barriers to entry by competing auditors are higher, as proxied by client size, international operations, and IFRS use. Finally, we find evidence that audit quality is decreasing in Big 4 market concentration for these types of engagements. This indicates a wealth transfer from shareholders to audit firms when auditor concentration is high because these complex clients are charged more, but receive audits that are of lower quality.

Keywords: audit market concentration; audit fees; audit pricing; cross-country audit fees, global audit fees, International Financial Reporting Standards, client complexity

JEL Classification: M41, M42

Suggested Citation

Gunn, Joshua L. and Kawada, Brett and Michas, Paul N., Audit Market Concentration, Audit Fees, and Audit Quality: A Cross-Country Analysis of Complex Audit Clients (September 20, 2019). Available at SSRN: https://ssrn.com/abstract=3457551 or http://dx.doi.org/10.2139/ssrn.3457551

Joshua L. Gunn

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Brett Kawada

San Diego State University - Accountancy ( email )

United States

Paul N. Michas (Contact Author)

University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States

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