Auditee Merger, Audit Fees,and the Market Dominance of Big Four Accounting Firms

47 Pages Posted: 8 Feb 2024

See all articles by Fayez A. Elayan

Fayez A. Elayan

Brock University-Goodman School of Business

Kareen Brown

Brock University

Parunchana Pacharn

Brock University

Yijia Chen

University of Waterloo - School of Accounting and Finance

Jennifer Li

Brock University

Date Written: January 19, 2024

Abstract

The market dominance of the Big-Four accounting firms (BIG4) has drawn attention from the public, regulators, and researchers. The market power of the BIG4 can have an impact of their audit quality, independence, and their power to increase the fees. In this paper, we examine how and whether the auditors adjust their fees in response focus the mergers of their clients. We argue that the mergers result in lower audit costs and higher market power, which allow us to understand how auditors might adjust their fees in response to the changes in their costs and market power. In addition, we investigate whether the auditor might perform a role of an information intermediary in the merger transactions, as suggested in prior literature. We find no evidence to support the cost savings hypothesis. The post-merger fees increase overall, indicating that the auditors do not pass on any cost savings to the clients, although the changes in fee respond to some factors related to cost savings. Our results overall suggest that the post-merger fees increase with the market power of the auditor, especially for the BIG4 auditors. Finally, we find no evidence, as reflected in changes in audit fees, to suggest that the auditor acts in the capacity of an information intermediary.

Keywords: Big Four Accounting Firms, Auditors, Market Concentration, Auditee Mergers, Audit Fee

JEL Classification: M41, M42

Suggested Citation

Elayan, Fayez A. and Brown, Kareen and Pacharn, Parunchana and Chen, Yijia and Li, Jingyu, Auditee Merger, Audit Fees,and the Market Dominance of Big Four Accounting Firms (January 19, 2024). Available at SSRN: https://ssrn.com/abstract=4700711 or http://dx.doi.org/10.2139/ssrn.4700711

Fayez A. Elayan (Contact Author)

Brock University-Goodman School of Business ( email )

1812 Sir Issac Brock Way
St. Catharines, Ontario L2S 3A1
Canada
905-688-5550 (Phone)
905-688-9779 (Fax)

HOME PAGE: http://www.brocku.ca

Kareen Brown

Brock University ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Parunchana Pacharn

Brock University ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Yijia Chen

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

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

Jingyu Li

Brock University ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

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