Do Entry Barriers Allow Low Quality Audit Firms to Enter the Public Company Audit Market?
51 Pages Posted: 6 May 2020 Last revised: 20 Jul 2023
Date Written: April 25, 2023
Abstract
While much regulatory and academic attention is focused on competition among Big 4 auditors, little is known about entry into the public company audit market. In markets with high information asymmetry, such as auditing, low barriers may allow low-quality entrants (von Weizsacker 1980; Grossman and Horn 1988). From 2004 to 2017, 388 audit firms entered the U.S. public company audit market. We find that these new-entrant auditors provide lower quality audits as measured by likelihood of client restatements, PCAOB-identified audit deficiencies, PCAOB disciplinary orders, and effort. This low quality persists beyond the year of entry. We also find that these new entrants collect lower audit fees and their clients are more likely to dismiss them. Collectively, our results suggest that existing barriers allow low quality auditors to enter the public company audit market and offer an alternative view to regulatory concerns about lack of competition in the audit market.
Keywords: Audit market, audit competition, non-Big 4 audit firms, audit quality, PCAOB
JEL Classification: D02, D43, G38, K23, M41, M42, M48
Suggested Citation: Suggested Citation