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    Does Audit Market Concentration Harm the Quality of Audited...
    research summary posted April 17, 2014 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 15.0 International Matters 
    Does Audit Market Concentration Harm the Quality of Audited Earnings? Evidence from Audit Markets in 42 Countries
    Practical Implications:

    The findings of this study provide important evidence in response to global concerns of regulators and policymakers over the dominance of Big 4 accounting firms in the audits of listed companies. Specifically, this study concludes that Big 4 dominance does not necessarily harm audit quality, and in fact appears to be associated with higher quality audits. Concentration within the Big 4 group, however, seems to be more problematic. Regulators and policymakers can benefit from this analysis as it provides unexpected insights into the consequences of audit market concentration.

    For more information on this study, please contact Jere R. Francis.


    Francis, J. R., P. N. Michas, and S. E. Seavey. 2013. Does Audit Market Concentration Harm the Quality of Audited Earnings? Evidence from Audit Markets in 42 Countries. Contemporary Accounting Research 30 (1).

    accounting firms; industrial competition; corporate profits; audit quality control; government policy; accrual basis accounting; cross-cultural studies.
    Purpose of the Study:

    Audit regulators around the world have expressed concern over market dominance by Big 4 accounting firms and the potential adverse effect it may have on the quality of audited financial statements. This study investigates whether cross-country variation in audit market structure affects engagement-level audit outcomes in countries. Additionally, the study examines the effect of audit market concentration on clients’ earnings quality. The authors attempt to determine how growing market dominance of Big 4 accounting firms effects audit quality and whether concerns over this lack of market diversity are valid.

    Design/Method/ Approach:

    The sample period in this study is 1999-2007. Using data from the Global Vantage database, the authors computed market concentration measures using the Big 4 accounting firms (plus Arthur Anderson up to 2001). The authors also investigated two aspects of Big 4 audit market domination and the potentially negative effect it has on earnings quality. The quality of audit earnings is measured with respect to total accruals, abnormal accruals, the likelihood of reporting a profit, and timely loss recognition.

    • Big 4 audits and non-Big 4 audits are of higher quality in those countries where the Big 4 conduct a higher percentage of total audits.
    • Earnings quality is lower for Big 4 clients in countries where there is greater market concentration within the Big 4 group.


    Audit Quality & Quality Control, International Matters