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    Non-Big 4 Local Market Leadership and its Effect on...
    research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications 
    Non-Big 4 Local Market Leadership and its Effect on Competition
    Practical Implications:

    The results of this study are important to audit policymakers, academics, and practitioners. Though Non-Big 4 firms audit fewer publicly traded companies, the results indicate that they are still able to develop a reputation on their full book of business that enables them to become market leaders. In addition, policymakers’ efforts to increase Non-Big 4 market share may not work nationwide. The authors show that certain local characteristics impact the likelihood of Non-Big 4 local leadership, which suggests that targeted efforts may be more beneficial than nationwide efforts. Finally, the results imply that though the presence of a Non-Big 4 local market leader creates downward fee pressure on audit firms, Big 4 and Non-Big 4 firms are not substitutes as Big 4 firms still earn a fee premium in these markets. 


    Keune, M.B., B.W. Mayhew, and J.J. Schmidt. 2016. Non-Big 4 local market leadership and its effect on competition. The Accounting Review. 91(3): 907-931.

    local audit market; Big 4 market competition; audit fee premium
    Purpose of the Study:

    Non-Big 4 public accounting firms in many major metropolitan areas are as large as or larger than the Big 4 firms present in the market. However, prior academic research has assumed that little competition exists between Big 4 and Non-Big 4 public accounting firms. As a result of this supposed lack of competition, policymakers in the U.S. and Europe have suggested that they step in to grow Non-Big 4 firms. Regulatory intervention may be unwarranted though given a Government Accountability Office study from 2008 that shows that though large publicly traded companies are limited in their choice of auditor, they still obtain competitive fees. This paper investigates whether and how these seemingly contradictory findings can be accurate. Specifically, the authors:


    • Examine the local factors associated with Non-Big 4 local market leadership from both the demand and supply sides.


    • Examine the relationship between Non-Big 4 local market leadership and competition.


    The authors also introduce a new measure of market leadership based on overall office size. 

    Design/Method/ Approach:

    The authors collected the accounting firm rankings from local business publications for the top 50 largest U.S. Metropolitan Statistical Areas. The accounting firm rankings are based on the number of employees, professional staff, or CPAs in the local office. Audit fees, local market characteristics, and other variables were obtained from the Audit Analytics database and Compustat. The information collected on these firms was for years 2005-2010. 

    • The authors find that Non-Big 4 market leadership is less likely in markets that have more Fortune 1000 clients and more initial public offerings.


    • The authors find that Non-Big 4 market leadership is more likely in markets without a large airport hub, with lower litigation costs, and with lower average educational attainment of the labor pool.


    • The authors find that, on average, audit fees are 18% lower in markets with Non-Big 4 firm leadership. Fees are lower the closer the Non-Big 4 leaders are in size to the Big 4 firms in the market.


    • The authors find that the Non-Big 4 leader firms are able to earn a fee premium, but that the Big 4 firms in those markets still earn a fee premium above and beyond the Non-Big 4 leader’s fee premium. 
    Auditor Selection and Auditor Changes
    Auditor Qualifications (e.g. size - industry expertise)