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    On the Benefits of Audit Market Consolidation: Evidence from...
    research summary posted March 31, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 11.0 Audit Quality and Quality Control, 11.07 Attempts to Measure Audit Quality 
    On the Benefits of Audit Market Consolidation: Evidence from Merged Firms.
    Practical Implications:

    The study results are important to audit firms and audit clients as they show audit efficiency benefits (lower audit hours and improved audit quality) post-merger. Although a merger with an international Big 4 firm may bring some reputational improvements, mergers with domestic Big 10 firms create improvements in audit efficiency. Audit firms interested in merging in the Chinese market should consider the benefits of local expertise and higher fees in a merger transaction. These results provide further insights into mergers and acquisitions and the benefits of economies of scale when performing audits.   


    Gong, Q., O. Z. Li, Y. Lin, and L. Wu. 2016. On the Benefits of Audit Market Consolidation: Evidence from Merged Audit Firms. The Accounting Review 91 (2): 463488.

    audit mergers, efficiency gains, audit fees, audit hours
    Purpose of the Study:

    This study assesses whether there is an improvement in audit efficiency associated with audit firm mergers. The authors specifically investigate if there is a change in audit hours, quality, and fees in the period after the audit firm merger. With the public disclosure of Chinese audit firm hours, the authors can empirically assess changes in audit operations subsequent to an audit firm merger.

    The Chinese audit market has undergone rapid transformation due to the increase in stock offerings and publicly traded firms. International Big 4 firms have increased financial and human resource investments in the Chinese audit firm market. In response to this changing environment, domestic Chinese firms have entered into merger transactions to bolster their market share to achieve economies of scale to compete with the Big 4 firms. The Chinese government and the China Institute of Certified Public Accountants (CICPA) have supported increasing the size for domestic firms. This rapid market consolidation provides a unique context to evaluate the effects on audit firm mergers on audit efficiency and quality. Due to limited empirical studies on audit firm mergers, the authors embark on this study to understand the impact of audit firm mergers on auditor effort and audit quality.

    Design/Method/ Approach:

    The authors employ an archival research methodology in this study. Audit firm merger information is from the CICPA database, financial newspapers, and audit firm websites. Audit firm client financial information is from the China Stock Market and Accounting Research Database (CSMAR). The sample period is from 2005-2009. Eighteen mergers are included in the sample population.

    • The authors find that audit firm mergers reduce audit effort represented by a 15.38 percent decrease in audit hours after an audit firm merger.
    • When assessing audit quality, the authors find that the probability of a financial statement decreases after an audit firm merger and that the probability of a modified audit opinion increases. These both support that audit quality improves after a merger. In addition, the probability of earning manipulation decreases with accounting conservatism increasing. The audit firm client’s accrual quality is not associated with audit firm mergers.
    • Combining the reduction in audit effort with the improvement in audit quality, these results show an improvement to audit efficiency after an audit firm merger. 
    • In supplemental analyses, the authors evaluate the effect of audit efficiency over time and note that the improvements occur over a three-year period with the highest reduction in audit effort (hours) occurring in the third year.
    • The authors also find that audit efficiencies are greater when the audit firm merges with a domestic Big 10 audit firm rather than with international Big 4 firm. The authors note that this difference could result from differences in the types of firms that the acquirers target.
    • In evaluating audit fees, the authors find that audit fees increase after an audit firm merger and the increase is not a result of market conditions.  
    Audit Quality & Quality Control, Engagement Management
    Attempts to Measure Audit Quality, Audit Fees & Fee Negotiations