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Does Audit Market Concentration Harm the Quality of Audited Earnings? Evidence from Audit Markets in 42 Countries

Contemporary accounting research, 2013-03, Vol.30 (1), p.325-355 [Peer Reviewed Journal]

2012 The Canadian Academic Accounting Association ;Copyright Canadian Academic Accounting Association Spring 2013 ;ISSN: 0823-9150 ;EISSN: 1911-3846 ;DOI: 10.1111/j.1911-3846.2012.01156.x

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  • Title:
    Does Audit Market Concentration Harm the Quality of Audited Earnings? Evidence from Audit Markets in 42 Countries
  • Author: Francis, Jere R. ; Michas, Paul N. ; Seavey, Scott E.
  • Subjects: Accounting ; Audit offices ; Audited financial statements ; Auditing ; Audits ; Big Four accounting firms ; Financial reporting ; International ; Market share ; Market shares ; Market structure ; Studies
  • Is Part Of: Contemporary accounting research, 2013-03, Vol.30 (1), p.325-355
  • Description: Audit regulators around the world have expressed concern over market dominance by Big 4 accounting firms and the potential adverse effect it may have on the quality of audited financial statements. We use cross‐country variation in the audit market structure of 42 countries to examine two separate aspects of Big 4 dominance: (1) Big 4 market concentration as a group relative to non–Big 4 auditors; and (2) concentration within the Big 4 group in which one or more of the Big 4 firms is dominant relative to the other Big 4 firms. We find that in countries where the Big 4 (as a group) conduct more listed company audits, both Big 4 and non–Big 4 clients have higher quality audited earnings compared to clients in countries with smaller Big 4 market shares. In contrast, in countries where there is a greater concentration within the Big 4 group, we find that Big 4 clients have lower quality audited earnings compared to countries with more evenly distributed market shares among the Big 4. Thus concentration within the Big 4 group appears to be detrimental to audit quality in a country and of legitimate concern to regulators and policymakers. However, Big 4 dominance per se does not appear to harm audit quality and is in fact associated with higher earnings quality, after controlling for other country characteristics that potentially affect earnings quality.
  • Publisher: Oxford, UK: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0823-9150
    EISSN: 1911-3846
    DOI: 10.1111/j.1911-3846.2012.01156.x
  • Source: Alma/SFX Local Collection
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