“The Effect of Local Audit Market Competition on Audit Quality and Fees” – by Prof. Jong-Hag Choi
Accounting & Law Seminar
Prof. Jong-Hag Choi
Professor in Accounting
College of Business Administration
Seoul National University
Audit market competition has been a great concern for regulators since regulators worry that it may structurally affect audit quality and audit fees. However, a consensus has not yet been made on the direction of the effects. Using the number of auditors (audit offices) located in the local area as a proxy for audit market competition, we re-examine the controversy. Our empirical results reveal the following. First, we find that audit quality deteriorates as the number of auditors increases. Second, audit fees decrease with a greater number of auditors. We document that both effects are mainly driven by the number of non-Big 4 auditors rather than by the number of Big 4 auditors in the local audit market. Lastly, we document that the aforementioned effects do not exist in the market segment with extremely large clients who demand audits exclusively from Big 4 auditors. However, in the other market segment, both Big 4 and non-Big 4 auditors are affected by the number auditors, especially the number of non-Big 4 auditors in the MSA. Collectively, our results show that greater audit market competition brings about impaired audit quality and lower audit fees. These findings provide regulators and many other interested parties with valuable insights into the effect of audit market structure on auditor behavior.