City Markets as a Unit of Analysis in Audit Research and the Re‐Examination of Big 6 Market Shares

Abstract

Big 6 market shares based on aggregate national data have been used in prior research to infer market leadership and industry expertise, and to differentiate Big 6 accounting firms from one another. In this study it is demonstrated that further differences exist with respect to city‐specific audit markets, both between firms and within the same firm across different city markets. The specific finding is that the national market leader is not the city‐specific market leader the vast majority of time. Usefulness of the city‐level unit of analysis is further demonstrated by re‐examining the 1989 mergers creating Ernst & Young and Deloitte Touche. The primary effect of the Ernst & Young merger was to increase market shares in cities in which the pre‐merger firms already had significant market shares, resulting in an increase in the number of cities in which the merged firm achieved top ranking. In contrast, the primary effect of the Deloitte Touche merger was an expansionof the number of city‐level markets in which the merged firm had significant (though not leading) market shares. The findings of this study suggest that, in order to move beyond our current understanding, important audit research questions such as the reason for particular auditor–client alignments, the competitive nature of markets, audit pricing of reputations, and auditor reporting and independence issues should be investigated in city‐level markets where audit contracting occurs and where Big 6 market shares (and presumably reputations) vary widely from city to city.

The Contagion Effect of Low-Quality Audits

“…Prior research argues that offices are the primary decision-making units in accounting firms (Francis et al 1999b;Francis and Yu 2009;Wallman 1996). However, the extant literature that investigates the determinants of audit quality at the auditor office-level is relatively scant.…”

Analisis Pengaruh Ukuran Kantor Akuntan Publik Terhadap Kualitas Audit di Indonesia

“…Penilaian skeptis tersebut didukung dengan adanya penelitian Francis & Yu (2009), yang memberikan bukti empiris ketidakseragaman kualitas audit pada kantor audit Big 4 di Amerika. Penelitian di atas merupakan kelanjutan dari penelitian sebelumnya yang dilakukan Francis et al (1999) dan Ferguson et al (2003). Namun, penelitian sebelumnya tersebut hampir tidak ada yang melakukan pengujian secara terpisah antara kelompok sampel yang merupakan klien KAP Big 4 dan kelompok sampel yang merupakan klien KAP Non-Big 4 agar dapat melihat keseragaman kualitas audit pada masing-masing kelompok sampel.…”

Does a Lack of Choice Lead to Lower Quality?: Evidence from Auditor Competition and Client Restatements

“…First, measuring audit market competition at the MSA level provides for greater variation in competition (and, hence, potentially more informative tests) than when competition is measured at the national level. Second, and more importantly, decisions about audit opinions and audit pricing primarily are made at the local office level (Francis et al 1999;Reynolds and Francis 2000). Third, the majority of firms are audited by auditors located in the same area (Choi et al 2012).…”

“…Furthermore, non-Big 4 firms that cannot compete effectively with Big 4 firms on a national basis do have a more significant presence in some local markets. Finally, decisions about audit opinions and audit pricing are primarily made at the local office level (Francis et al 1999;Reynolds and Francis 2000), and variations in auditor expertise and audit quality have also been documented across offices within the same audit firm (e.g., Krishnan 2005;Choi et al 2010;). All of these factors suggest that the MSA level is the appropriate level for measuring auditor competition.…”