Premium
An examination of the relation between market structure and the profitability of audit engagements
Author(s) -
Ciconte Will,
Knechel Walter Robert,
Schelleman Caren
Publication year - 2015
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12078
Subject(s) - audit , profitability index , oligopoly , cournot competition , market structure , business , market concentration , monopolistic competition , market share , economic rent , industrial organization , competition (biology) , accounting , microeconomics , economics , finance , monopoly , ecology , biology
Due to increasing supplier concentration, there is growing concern regarding the lack of competition in the audit market. Theory based on Cournot oligopoly predicts that increasing concentration will facilitate monopolistic behaviour. Conversely, if the market for audit services has more in common with a Bertrand oligopoly, concentration may not lead to higher fees. We evaluate whether increased audit supplier concentration leads to economic rents by investigating audit profitability. Using proprietary data from a (then) Big 6 audit firm, we find that local market structure has a significant and positive association with audit profitability, but not auditor effort for large clients.