The Market for Audit Services: The Role of Market Power

Journal of International Accounting Research

Posted: 7 Apr 2021

See all articles by Tracy Gu

Tracy Gu

The University of Hong Kong (HKU), Accounting Division, Faculty of Business and Economics

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Michael T. Stein

Old Dominion University

Minlei Ye

University of Toronto

Ping Zhang

University of Toronto - Rotman School of Management

Date Written: April 7, 2021

Abstract

The market for audit services has been the subject of extensive academic research since the 1970’s. The prevailing view is that audit markets are characterized by tiers of suppliers (Big 4 vs. non-Big 4, and industry specialists vs. non-specialists) where the upper-tier suppliers produce and sell a systematically higher level of assurance, while competition among suppliers within tiers is essentially perfect and a uniform price prevails within the submarkets. We discuss three papers that challenge this orthodoxy. These papers argue and find that the price of an audit is essentially unique to each (auditor, client) pair and that this price depends on both audit firm size and client size. Furthermore, audit firm size is linked with the firm’s capital investments which enhance auditor efficiency and market power. We conclude that audit markets are atomistic and that local market power is an important determinant of audit prices and audit fees.

Keywords: audit markets; pricing; market power; capital investments

JEL Classification: M41, D40

Suggested Citation

Gu, Tracy (Ti) and Simunic, Dan A. and Stein, Michael T. and Ye, Minlei and Zhang, Ping, The Market for Audit Services: The Role of Market Power (April 7, 2021). Journal of International Accounting Research, Available at SSRN: https://ssrn.com/abstract=3821351 or http://dx.doi.org/10.2139/ssrn.3821351

Tracy (Ti) Gu

The University of Hong Kong (HKU), Accounting Division, Faculty of Business and Economics ( email )

#1312, KK Leung Building
Pokfulam Road
Hong Kong
+852 3917-8345 (Phone)

Dan A. Simunic (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

Michael T. Stein

Old Dominion University ( email )

Strome College of Business
Norfolk, VA VA 23529
United States
17576835495 (Phone)

Minlei Ye

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Ping Zhang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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