Publication Type

Journal Article

Version

publishedVersion

Publication Date

4-2020

Abstract

Regulators and audit market participants have concerned that less competitive audit market makes auditors to reduce the incentives to conduct high-quality audits. While a few studies examine the effect of competition in the U.S. local audit markets, they report conflicting evidence using the static Herfindahl index which is arguably noisy in capturing the intensity of competition. The purpose of this paper is to provide evidence on the effect of dynamic auditor competition in local audit markets on audit quality. For this purpose, we employ a measure to capture the dynamic nature of audit market competition: the proportion of clients switching auditors in the local market. Employing this measure, we find evidence suggesting a positive relation between auditor competition and audit quality and that the relation is stronger in large MSAs and for clients whose relative importance to audit office is smaller. This paper adds to the competition-audit quality literature by utilizing dynamic measures of audit market structure. In addition, the findings in this paper provide important evidence in response to the regulatory concerns that low competition is harmful to audit quality in a sense that it can cause auditor complacency and less rigorous audit procedures.

Keywords

audit market competition, audit quality, dynamic auditor competition, MSA size, client importance

Discipline

Accounting

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Korean Accounting Review

Volume

45

Issue

2

First Page

31

Last Page

75

ISSN

1229-3288

Identifier

10.24056/KAR.2019.12.002

Publisher

Korean Accounting Association

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.24056/KAR.2019.12.002

Download

Included in

Accounting Commons

Share

COinS