EconPapers    
Economics at your fingertips  
 

Fee competition among Big 4 auditors and audit quality

Sharad Asthana (), Inder Khurana () and K. K. Raman ()
Additional contact information
Sharad Asthana: The University of Texas at San Antonio
Inder Khurana: University of Missouri
K. K. Raman: The University of Texas at San Antonio

Review of Quantitative Finance and Accounting, 2019, vol. 52, issue 2, No 3, 403-438

Abstract: Abstract Both the GAO (Public accounting firms: mandated study on consolidation and competition. GAO, Washington, 2003; Audits of public companies: continued concentration in audit market for large public companies does not call for immediate action. GAO, Washington, 2008) and the US Treasury (Advisory committee on the auditing profession: final report, 2008. http://www.tres.gov/offices/domestic-finance/acap/docs/final-report.pdf ) have implied that the Big 4 dominated US audit market lacks competition. More recently, the PCAOB has expressed a somewhat different concern, i.e., that because audit committees may be primarily interested in negotiating a lower audit fee (rather than championing higher audit quality) for their clients, fee competition in the US audit market could pressure the incumbent auditor to compromise on audit quality (Doty in Keynote address: the reliability, role and relevance of the audit: a turning point, 2011. www.pcaobus.org ). We utilize the notion of counterfactual fees chargeable by auditors to assess fee competition and investigate competing views on the relation between fee competition among Big 4 auditors and audit quality in US local audit markets. To operationalize fee competition at the client-level in the context of each local audit market, we compute a separate counterfactual audit fee that would be charged by every other Big 4 auditor for that particular engagement and use the minima of the counterfactuals. We validate our audit fee competition metric by showing a positive relation with the incumbent auditor’s switching risk. Collectively, our findings suggest that fee competition is useful as a mechanism for improving audit quality in the highly concentrated US audit market, albeit only in local audit markets where the incumbent auditor has below-median market power and only for higher quality clients. Overall, our findings speak to the interplay between fee competition and auditor incentives and are of potential interest to regulators such as the PCAOB concerned about competition in US audit markets.

Keywords: Big 4 firms; Audit fee competition; Audit quality; PCAOB (search for similar items in EconPapers)
JEL-codes: M41 M42 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-018-0714-9 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:52:y:2019:i:2:d:10.1007_s11156-018-0714-9

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-018-0714-9

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2025-03-19
Handle: RePEc:kap:rqfnac:v:52:y:2019:i:2:d:10.1007_s11156-018-0714-9