Audit Fees and Auditor Size: Further Evidence

TLDR

The public accounting market, especially audit services, has attracted scrutiny, with a focus on the dominance of the Big Eight firms. The study tests whether the Big Eight act as a cartel and charge above competitive fees. Simunic’s analysis found that, on average, Big Eight firms charged lower fees than non‑Big Eight firms, consistent with scale economies, though one firm charged higher fees potentially reflecting higher audit quality.

Abstract

During the past decade, the structure of the market for public accounting services-particularly audit services-has received scrutiny from regulators, practitioners, and researchers. A major focus has been on supplier (audit firm) size, and especially on the large shares of markets held by a subset of firms called the Big Eight.' One hypothesis is that the Big Eight function as a cartel and higher than competitively warranted fees. This hypothesis was tested by Simunic [1980], who concluded that the Big Eight as a group tended to lower fees than non-Big Eight firms. His conjecture was that his results were consistent with scale economies enjoyed by the larger CPA firms. He did observe, however, that one of his Big Eight firms seemed to charge higher fees, which might reflect the higher quality of the audit services supplied by that firm.2