Office-Client Balance and Metro Area Audit Market Competition

Michael Ettredge · Matthew G. Sherwood · Lili Sun

14 citations0/0 files storedAuditing A Journal of Practice & Theory

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Auditing, Earnings Management, Governance Merger and Competition Analysis Corporate Governance and Financial Management

Abstract

SUMMARY We propose a new audit supplier competition construct, the Office-Client Balance (OCB), which consists of the relative abundance of competing audit offices and audit clients in a metropolitan (metro) area. From this construct, we derive a metro level audit competition proxy reflecting surpluses or shortfalls of total metro audit office numbers relative to the national metro OCB norm: the OCB_TOT. Consistent with the predictions of Porter's Five Forces theory, we find that OCB_TOT is associated with lower fees, more auditor turnover, and more (less) office exits (entrances) in metro audit markets. These findings validate OCB_TOT as a proxy for audit market competition. Our results indicate that greater metro level competition among auditors (more positive OCB_TOT) is associated with higher audit quality, proxied by fewer financial statement misstatements. Several additional analyses suggest that OCB_TOT is useful in explaining clients' choices of local (versus remote) audit offices and Big 4 (versus non-Big 4) offices. Data Availability: Data used in this study are available from public sources. JEL Classifications: G18; L10; M42.

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References

2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 1989How Competitive Forces Shape Strategy 2014A review of archival auditing research 1980The Pricing of Audit Services: Theory and Evidence 2011Predicting Material Accounting Misstatements*1994Shareholder Litigation and Corporate Disclosures 2005The impact of performance-based compensation on misreporting 2004Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia

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