The Effect of Audit Market Competition on Audit Quality and Pricing in a Non-Big 4 Market

Abstract

Audit markets are generally characterised as concentrated markets as the result of mergers and acquisitions among audit firms. Audit scandals around the world have raised concerns about whether concentration in the market for audit services has an adverse impact on competition and audit quality. We examine the impact of increasing competition on audit pricing and audit quality in an emerging market where regulatory policies have resulted in increased competition (less market concentration) in the audit market and Big 4 auditors are banned. In addition, we extend our analyses using a sample from other developing audit markets where the audit markets are becoming more concentrated rather than less concentrated. We find that lower levels of audit market concentration measured using the Herfindahl index are associated with lower audit fees, a lower likelihood of issuing modified audit opinion, and higher levels of abnormal accruals. These results suggest that increased competition in audit markets in developing economies generate audit fee pressure, which negatively affects audit quality. We provide evidence on the impact of competition in audit markets in developing economies on audit pricing and audit quality. Our findings inform regulators about the consequences of increasing competition in audit markets in developing economies.

Keywords: Audit Market Competition, Audit Fees; Audit Quality, Developing Economies

JEL Classification: M41, M42