The Effect of Potential Entrants on Audit Market Competition

Devin Williams, University of Illinois; University of Florida investigates The Effect of Potential Entrants on Audit Market Competition.

ABSTRACT: Concerns regarding a lack of competition in the market for public-company audits focus on Big Four audit firms. Little concern has been raised regarding Non-Big Four firms, yet we know little about competition and barriers to entry in this market. Prior studies only consider competition from audit firms that already have public-company clients. I examine the role of potential entrants – PCAOB registered audit firms with no public clients – as an additional source of competition that can affect the quality and pricing of small firms in the public-company audit market. I find that audit quality increases and audit fees decrease for clients of Non-Big Four auditors when competition from potential entrants increases. Collectively, the results inform regulators and academics of the role potential entrants play in improving the financial reporting environment.