Does audit market concentration harm the quality of audited earnings? Evidence from audit markets in 42 countries

Jere R. Francis, Paul N Michas, Scott E. Seavey

Research output: Contribution to journalArticle

80 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)325-355
Number of pages31
JournalContemporary Accounting Research
Volume30
Issue number1
DOIs
StatePublished - Mar 2013

Fingerprint

Audit market
Big 4
Market concentration
Earnings quality
Audit
Audit quality
Market share
Market structure
Auditors
Financial statements
Accounting firms
Politicians
Listed companies

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Does audit market concentration harm the quality of audited earnings? Evidence from audit markets in 42 countries. / Francis, Jere R.; Michas, Paul N; Seavey, Scott E.

In: Contemporary Accounting Research, Vol. 30, No. 1, 03.2013, p. 325-355.

Research output: Contribution to journalArticle

@article{6da01174b13e4528b8beac187c149e3b,
title = "Does audit market concentration harm the quality of audited earnings? Evidence from audit markets in 42 countries",
abstract = "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.",
author = "Francis, {Jere R.} and Michas, {Paul N} and Seavey, {Scott E.}",
year = "2013",
month = "3",
doi = "10.1111/j.1911-3846.2012.01156.x",
language = "English (US)",
volume = "30",
pages = "325--355",
journal = "Contemporary Accounting Research",
issn = "0823-9150",
publisher = "Wiley-Blackwell",
number = "1",

}

TY - JOUR

T1 - Does audit market concentration harm the quality of audited earnings? Evidence from audit markets in 42 countries

AU - Francis, Jere R.

AU - Michas, Paul N

AU - Seavey, Scott E.

PY - 2013/3

Y1 - 2013/3

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=84875524610&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84875524610&partnerID=8YFLogxK

U2 - 10.1111/j.1911-3846.2012.01156.x

DO - 10.1111/j.1911-3846.2012.01156.x

M3 - Article

AN - SCOPUS:84875524610

VL - 30

SP - 325

EP - 355

JO - Contemporary Accounting Research

JF - Contemporary Accounting Research

SN - 0823-9150

IS - 1

ER -