Audit Industry Dynamics: Factors Affecting Changes in Client-Industry Market Shares

Abstract

Recently, there has been some interest in various aspects of the market for audit services in the United States. One of these is the extent to which we can explain shifts in market shares of audit firms within the context of generalized economies of scale (Arnett and Danos [1979]). This paper provides results from the application of Stigler's [1958] survivorship approach to the detection of economies of scale, based on changes in CPA-firm market share positions over a seven-year period (1972 to 1979). The following section briefly outlines the survivorship approach and considers plausible sources of economies of scale in the provision of audit services. Subsequent sections specify the model and data employed in statistical tests and provide both formal test results and descriptive data. The tests indicate that the audit industry is characterized by scale effects which favor CPA firms which are large overall and, on a client-industry basis, those with heavy involvement in regulated client industries. Firms with very large market shares in nonregulated client industries experience erosion of their market shares over time. This erosion was not observed in the sampled regulated industries. The research opportunities suggested by this research are discussed in the final section of the paper.