Audit Market Regulation and Supplier Concentration Around the World: Empirical Evidence
In the ongoing discussions on audit regulation, the key issues of auditor independence and a high level of audit market concentration have become apparent. However, there is the concern that regulations intended to improve auditor independence (i.e., restrictions regarding the joint supply of audit and non-audit services, audit firm rotation, joint audits, etc.) might further increase audit market concentration. We address this issue with an empirical analysis. Based on a cross-country study for the years 2001–2010, we investigate whether a country's audit regulation is connected to the combined market share of the four largest audit firms (Concentration Ratio, CR 4), the inequality in the market share distribution (Hirschmann-Herfindahl-Index, HHI), and the number of audit firms per client active in that country's audit market (Auditor Client Ratio). Our final sample consists of 141,190 firm-year observations of listed companies with a total of 2,439 audit firms, taken from 29 countries. The results of our country-fixed-effects models indicate that regulators should take the connections between potentially conflicting goals into account: Whereas the existence of a proportionate liability system and the prohibition of the joint supply of audit and non-audit services significantly decrease supplier concentration, joint audits and the mandatory audit firm rotation significantly increase audit market concentration. Thus, this study points to the need to take into account clients' and audit firms' adaptive strategies to new regulations.
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