Concentration in the Market for Audit Services: an Analysis Across Client Industry Submarkets.

This research addresses the issue of auditor concentration in the United States. Despite substantial public concern over "excessive" concentration in the market for audit services, little evidence regarding possible causes of existing levels of concentration has been provided. Focusing on the conditions of supply in this market, the author attemps to model submarket concentration levels as a function of submarket client characteristics. More specifically, a cursory review of industrial organization literature supports the notion that increased economies of scale in production can be expected to lead to higher levels of seller concentration. Within the context of auditing, certain client characteristics, i.e., capital market activity, geographical dispersion, industry-specific regulatory control, and size in general, are identified as probable sources of production economies of scale for the CPA firm. Submarket auditor concentration is defined in terms of H indices and the expected impact of the distribution of these client characteristics upon such indices is systematically pursued in a probabilistic analytical model. This modeling process involves formal, but general, assumptions regarding CPA firm cost functions, client buying decisions, and competition within the market for audit services. The conclusion that auditor concentration levels should reflect the impact of these production economy of scale related client characteristics is subjected to a wide range of empirical tests. Using a sample of client firms approaching a complete enumeration of corporations subject to SEC filings, the author measures capital market activity in terms of stock exchange listings and new securities issuances. Industry-specific regulatory control is assumed in common carrier, public utility, financial and insurance industries. CPA firm activity levels are measured using a transformed client size surrogate for audit fees. St and ard OLS regression techniques yield highly significant positive associations between the operationalized capital market and regulatory independent variables and the dependent (H) variable across seventy 3-digit SIC code client industries for the 1978 point in time. Alternative tests, which further assume that 'Big 8' CPA firms capture the posited scale effects more completely than other CPA firms, yield generally congruent results both for 1978 and for changes in auditor/client relationships from 1973 to 1978. Implications of these results for public policy formulation in the area of auditor concentration are discussed in the final chapter. In particular, an apparent tradeoff between efficiency gains and possible losses due to non-competitive conditions is highlighted. Finally, the inability of the empirical tests pursued in this research to distinguish between supply oriented and dem and oriented theories of auditor concentration is concluded, with a call for further research into the highly complex structure of the market for audit services.PhDAccountingUniversity of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/158090/1/8106133.pd