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Author: Joseph J. Gerakos Publisher: ISBN: Category : Economics Languages : en Pages :
Book Description
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 policymakers. We explore the effects of two market scenarios that have been the focus of policy discussions: a) further supply concentration due to one of the "Big 4" auditors exiting and b) mandatory audit firm rotation. To do so, we first estimate publicly traded firms' demand for auditing services, treating services provided by each of the Big 4 as differentiated products. We then use those estimates to calculate how each scenario would affect client firms' consumer surplus. We estimate that, conservatively, exit by one of the Big 4 would reduce client firms' surplus by $1.2-1.8 billion per year. These estimates reflect only firms' lost options to hire the exiting auditor; they do not include the likely fee increases resulting from less competition among auditors. We calculate that the latter could result in audit fee increases between $0.3-0.5 billion per year. Such losses are substantial; by comparison, total audit fees for public firms were $11 billion in 2010. We find similarly large impacts from mandatory audit firm rotation, estimating consumer surplus losses at approximately $2.4-3.6 billion if rotation were required after ten years and $4.3-5.5 billion if rotation were mandatory after only four years.
Author: Joseph J. Gerakos Publisher: ISBN: Category : Economics Languages : en Pages :
Book Description
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 policymakers. We explore the effects of two market scenarios that have been the focus of policy discussions: a) further supply concentration due to one of the "Big 4" auditors exiting and b) mandatory audit firm rotation. To do so, we first estimate publicly traded firms' demand for auditing services, treating services provided by each of the Big 4 as differentiated products. We then use those estimates to calculate how each scenario would affect client firms' consumer surplus. We estimate that, conservatively, exit by one of the Big 4 would reduce client firms' surplus by $1.2-1.8 billion per year. These estimates reflect only firms' lost options to hire the exiting auditor; they do not include the likely fee increases resulting from less competition among auditors. We calculate that the latter could result in audit fee increases between $0.3-0.5 billion per year. Such losses are substantial; by comparison, total audit fees for public firms were $11 billion in 2010. We find similarly large impacts from mandatory audit firm rotation, estimating consumer surplus losses at approximately $2.4-3.6 billion if rotation were required after ten years and $4.3-5.5 billion if rotation were mandatory after only four years.
Author: Joseph Gerakos Publisher: ISBN: Category : Languages : en Pages :
Book Description
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 policymakers. 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, conservatively, mandatory audit firm rotation would induce consumer surplus losses of approximately $2.7 billion if rotation were required after ten 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.
Author: Maria T. Caban-Garcia Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
For many years, businesses, government regulators, and the public have expressed concern about the dominance of a few large public accounting firms in the audit market. Recent events have increased concern about the lack of competition in the auditing industry. Using market concentration measures we examine the level of competition among the remaining active audit firms before and after the merger between Price Waterhouse and Coopers & Lybrand and before and after the dissolution of Arthur Andersen. We also segment the audit market by auditor and client size and examine the effects of the consolidating events from these perspectives. We find that concentration did indeed increase after both events but, in most instances, decreased in the years between those two events. However, the remaining Big Four audit firms continue to dominate the market for audits of publicly held companies, particularly audits of large firms. We also find that, while some segments of the audit market are highly concentrated, there are a few segments that are relatively competitive.
Author: Benito Arrunada Publisher: Springer Science & Business Media ISBN: 1475767285 Category : Business & Economics Languages : en Pages : 203
Book Description
This book focuses on market mechanisms which protect quality in the provision of audit services. The role of public regulation is thus situated in the context defmed by the presence of these safeguard mechanisms. The book aims to contribute to a better understanding of these market mechanisms, which helps in defining the con tent of rules and the function of regulatory bodies in facilitating and strengthening the protective operation of the market. An analysis at a more general level is provided in the three chapters making up Part 1. In the four chapters of Part 2, on the other hand, this analysis is applied to a particular problem to determine how those non-audit services often provided by auditors to their audit clients should be regulated. Finally, Chapter 8 contains a summary of the analysis and conclusions of the work. The conclusion with regard to non-audit services is that their provision generates beneficial effects in terms of costs, technical competence, professional judgment and competition and, moreover, need not prejudice auditor independence or the quality of these services. This as sessment leads, in the normative sphere, to recommending a legislative policy aimed at facilitating the development and use of safeguards provided by the free action of market forces. Regulation should thus aim to enable the parties-audit firms, self-regulatory bodies and audit clients-to discover through competitive market interaction both the most efficient mix of services and the corresponding quality safeguards, adjusting for the costs and benefits of each possibility.
Author: Ling Chu Publisher: ISBN: Category : Languages : en Pages : 52
Book Description
We develop a measure to capture an audit firm's competitive position in a local audit market based on the transaction costs of changing audit firms included in DeAngelo's (1981) multi-period audit pricing model. Our competition measure reflects the size difference between the largest audit firm in a market and the other audit firms operating in that market. We find that audit fees of client firm i decrease as this size difference increases. This result suggests that dominant audit firms charge higher audit fees because of their significant local competitive advantage over smaller audit firms. In addition, we show that the boundaries of audit markets are mainly specified by client industry at the city level. However, the size of operations of a dominant audit firm outside such markets can enhance its competitive advantage within a client-industry, city-level market. Our study provides a market-power-based explanation for the excess audit fees earned by the largest audit firm(s) in local audit markets and advances understanding of audit market competition.
Author: Krish Bhaskar Publisher: Routledge ISBN: 1000007863 Category : Business & Economics Languages : en Pages : 144
Book Description
Focussing on the dominance of the Big Four auditing firms – PwC, EY, Deloitte and KPMG – this concise volume provides an authoritative critical assessment of the state and future of the audit market, currently the subject of much debate and the focus of significant government enquiries. Drawing on extensive research and a vast collection of evidence from interviews with insiders, experts and users, it explores the key issues of audit quality, independence, choice and the growing expectation gap. Just as disruptive technologies are overturning other established sectors, this book explores their impact on accounting, financial reporting and auditing. It questions whether the Big Four-dominated audit market is prepared not only for the inevitable disruption of new technologies, but also the challenges of negative public perceptions, cynicism about regulation and demands for greater transparency. In the context of increasing high-profile corporate failures, this book provides a compelling scrutiny of the industry’s failings and present difficulties, and the impact of future disruption. At this crucial time, it will be of great interest to students, researchers and professionals in accounting and auditing, as well as policy makers and regulators.
Author: Marek Kacer Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
Mechanical correlation bias is inherent in audit pricing studies when independent variables (X) are derived from firm level audit fees (Y); a form of endogeneity which appears not to have been addressed fully in the extant literature. Such variables are endogenous by construction leading to biased estimates, since (mechanically) X determines Y and Y determines X. After reviewing the extant auditing/accounting literature where mechanical correlation obtains (together with the remedies advocated to alleviate the associated bias), we employ mathematical derivations and simulations to quantify the bias associated with a range of mechanically correlated market competition and industry specialist variables. Since auditor market competition variables are important to regulators and antitrust authorities, we analyse the mechanical correlation issue with regard to an extant study which introduces a novel measure of audit market competition (derived from audit fees). The study provides evidence that smaller incumbent auditors are pressured into offering lower fees when competing against a large local audit firm. However, when the current client's audit fee is 'decoupled' from this new competition measure to mitigate bias, it is statistically insignificant in our multivariate regression analysis. Additionally, we employ auditee sales and total assets to construct proxies for competition variables (which are not mechanically correlated) and find them to be statistically insignificant. We conclude with suggestions of how to address the issue of mechanical correlation in future studies.
Author: Fakhroddin Mohammadrezaei Publisher: ISBN: Category : Languages : en Pages :
Book Description
This study investigates the effect of auditor type (private vs. state) and increased competition in an audit market on audit report lag (ARL). This is the first study to provide evidence regarding the effect of audit market competition on ARL. Utilizing structure-conduct-performance theory, we predict that competition pressures private auditors to be more efficient and to have less reporting lag than state auditors. We also predict that competition among auditors after a liberalization period forces auditors to be more efficient and to record less ARL than before. We use a unique data set in Iran, whereby the audit market liberalization (an audit market where services were previously provided primarily by a state entity) has resulted in both state and private auditors simultaneously providing audit services. The findings are consistent with the following hypothesis, that is ARL is shorter for private auditors than it is for state auditors, and ARL decreases as competition increases in the Iranian audit market. Consistent with the structure-conduct-performance theory, the findings suggest that increased competition in the audit market results in higher efficiency, as reflected by a shorter ARL.
Author: Nicholas Hallman Publisher: ISBN: Category : Languages : en Pages : 63
Book Description
Prior research provides mixed evidence about whether sufficient audit market competition exists and whether competition impairs or improves audit quality. A major impediment to this stream of research is the unobservable nature of the bidding process by which auditors compete for clients. In this study, we apply a machine learning algorithm to non-incumbent (i.e., competitor) auditor views of public companies' SEC filings to estimate the probability of bidding at the company-year level. We validate our probability estimates using a proprietary sample where all instances of bidding are known. We then investigate the association between the probability of bidding and previously documented measures of auditor competition (i.e., market concentration), audit quality, and audit pricing. Consistent with concerns that market concentration impedes competition, we find that bidding is less likely in industry-concentrated markets. However, contrary to conclusions in the prior literature, we find no evidence that local market concentration is associated with competitive bidding. We also find that bidding is associated with higher quality auditing but does not constrain audit fees.
Author: Joseph J. Gerakos
Author: Joseph J. Gerakos
Author: Joseph Gerakos
Author: Maria T. Caban-Garcia
Author: Benito Arrunada
Author: Ling Chu
Author: Krish Bhaskar
Author: Marek Kacer
Author: Fakhroddin Mohammadrezaei
Author: John W. Buckley
Author: Nicholas Hallman