Client Industry Competition and Auditor Industry Concentration

Abstract

Prior studies examining the association between auditor concentration and intra-industry competition in the client industry have yielded opposite results. I attempt to reconcile these findings by using an additional measure of intra-industry competition (the speed of adjustment of abnormal profits) and controlling for industry size. I document a negative association between auditor industry concentration and intra-industry competition, regardless of the measure of auditor concentration used. Thus, although the average level of auditor industry concentration is generally high, there is some evidence that a more competitive industry has lower auditor concentration. Therefore, involuntary audit market changes that reduce the number of audit firms available, may counter the effect of client industry competition in limiting auditor industry concentration.