Audit Market Concentration and Audit Fees: An International Investigation

Abstract

Following large-scale auditor consolidations in the late 1980s and early 1990s, along with Arthur Andersen’s collapse in 2001, the global audit market has become highly concentrated during the past 30 years. Many interested parties, including regulators, researchers, and practitioners, disagree on whether concentration would benefit or harm the audit market. To address this unresolved issue, we consider the role of legal regime in shaping the auditors’ incentives. Specifically, we first develop a model in which legal regime plays a significant role in explaining the effect of audit market concentration on audit fees. Our model predicts that, as the audit market becomes more concentrated, auditors charge higher audit fees in countries with a weak legal regime, but charge lower fees in countries with a strong legal regime. The empirical results with data from 27 countries support the model’s predictions. These findings provide regulators and other stakeholders with important insights into the consequences of audit market structure.