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Competition in the Audit Market: Policy Implications

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  • JOSEPH GERAKOS
  • CHAD SYVERSON

Abstract

The audit market's unique combination of features—its role in capital market transparency, mandated demand, and concentrated supply—means it receives considerable attention from policy makers. We explore the effects of two market scenarios that have been the focus of policy discussions: mandatory audit firm rotation and further supply concentration due to the exit of a “Big 4” audit firm. To do so, we first estimate publicly traded firms' demand for auditing services, allowing the services provided by each of the Big 4 to be differentiated products. We then use those estimates to calculate how each scenario would affect client firms' consumer surplus. We estimate that, for U.S. publicly trade firms, mandatory audit firm rotation would induce consumer surplus losses of approximately $2.7 billion if rotation were required after 10 years and $4.7–5.0 billion if after only four years. We find similarly that exit by one of the Big 4 would reduce client firms' surplus by $1.4–1.8 billion. These estimates reflect only the value of firms' lost options to hire the exiting audit firm; they do not include likely fee increases resulting from less competition among audit firms. The latter could result in audit fee increases between $0.75–1.3 billion per year for mandatory rotation and $0.47–0.58 billion per year for the disappearance of a Big 4 audit firm. Such losses are substantial; by comparison, total audit fees for public firms were $11 billion in 2010.

Suggested Citation

  • Joseph Gerakos & Chad Syverson, 2015. "Competition in the Audit Market: Policy Implications," Journal of Accounting Research, Wiley Blackwell, vol. 53(4), pages 725-775, September.
  • Handle: RePEc:bla:joares:v:53:y:2015:i:4:p:725-775
    DOI: 10.1111/1475-679X.12087
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    References listed on IDEAS

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    Cited by:

    1. Duguay, Raphael & Minnis, Michael & Sutherland, Andrew, 2019. "Regulatory Spillovers in Common Audit Markets," MPRA Paper 93669, University Library of Munich, Germany.
    2. repec:spr:reaccs:v:22:y:2017:i:4:d:10.1007_s11142-017-9418-y is not listed on IDEAS
    3. Mascha, Maureen Francis & Lamboy-Ruiz, Melvin A. & Janvrin, Diane J., 2018. "PCAOB inspections: An analysis of entity-level and application-level control audit deficiencies," International Journal of Accounting Information Systems, Elsevier, vol. 30(C), pages 19-39.
    4. Chu, Ling & Simunic, Dan A. & Ye, Minlei & Zhang, Ping, 2018. "Transaction costs and competition among audit firms in local markets," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 129-147.
    5. Fakhroddin MohammadRezaei & Norman Mohd‐Saleh, 2018. "Audit report lag: the role of auditor type and increased competition in the audit market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(3), pages 885-920, September.
    6. repec:spr:reaccs:v:22:y:2017:i:4:d:10.1007_s11142-017-9429-8 is not listed on IDEAS

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G3 - Financial Economics - - Corporate Finance and Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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