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    Audit Market Structure and Audit Pricing
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions 
    Audit Market Structure and Audit Pricing
    Practical Implications:

    The results of this paper contribute to the understanding of the determinants of audit firms’ initial audit price discount decisions. The results suggest that concentration of audit firms within the local audit market has a stronger influence on non-Big 4 audit firms’ initial pricing decisions compared to Big 4 firms’ initial pricing decisions. In addition, the results are of interest to regulators and managers who are concerned about the effect of audit market concentration on audit pricing and audit quality.


    Eshleman, J. D. and B. P. Lawson. 2017. Audit Market Structure and Audit Pricing. Accounting Horizons 31 (1): 57 – 81. 

    audit pricing, auditor switches, audit market concentration, and lowballing.
    Purpose of the Study:

    Increasingly, regulators, standard setters, and audit clients have expressed concern over the level of concentration in the U.S. audit market. The primary concern is that audit market concentration could result in higher fees for audit clients, which is supported by economic theory that suggests a positive association between concentration within an industry and industry prices. Despite this theory and the concerns that exist, the association between increased concentration within the U.S. audit market and audit fees remain unclear. Previous studies have examined this issue with mixed results. As a result of the mixed evidence that exists, the authors choose to re-examine the association between audit market concentration and audit fees. 

    Design/Method/ Approach:

    The authors use two settings to examine whether and how audit market concentration affects audit fees. First, they examine how concentration is related to audit fees in a sample of stable auditor-client relationships. Next, they examine how audit market concertation affects audit fees in a sample of firms that switch auditors. They conduct these examinations using a large sample of U.S. audit engagements covering the years 2000 – 2013.    

    • The authors find, in their test of non-changing audit clients, a significantly positive association between audit market concentration and audit fees.
      • The authors find that the positive association is driven by the inclusion of MSA-level indicator variables in the audit fee model that they chose. For example, when they control for MSA-level fixed effects in their models, they find the association between audit market concentration and audit fees changes from significantly negative to significantly positive.
    • The authors’ test of initial audit fee discounts indicates that increases in concentration significantly reduce the discounts.
    • The authors provide some evidence that the effect of local audit market concentration on audit fees is more pronounced for smaller clients.
    • The authors find that concentration is positively associated with audit quality, as proxied by abnormal accruals. 
    Client Acceptance and Continuance
    Audit Fee Decisions