The Pricing of Audit Services: Theory and Evidence

TLDR

Competition among auditors has been debated, with accusations of market monopolization by the Big Eight, yet evidence remains scarce and largely anecdotal. The paper tests whether price competition exists across the audit market for publicly held companies regardless of the share of a market segment serviced by the Big Eight firms. Using a cross‑sectional sample of audit fees, the study examines price competition.

Abstract

The question of the existence of competition among auditors has been the subject of considerable discussion in recent years. More specifically, the firms as a group have been accused of monopolizing the market for audits {Staff Study of the Subcommittee on Reports, Accounting and Management of the Senate Committee on Government Operations [1977]). However, evidence on the issue is scanty and typically anecdotal (e.g., Bernstein [1978]). The evidence of the Staff Study itself is limited to statistics, with the allegations relying on what has come to be called the concentration doctrine (Demsetz [1973]). According to this doctrine, supplier is a reliable indicator of supplier behavior and performance. In this paper, I provide evidence from a test of the hypothesis that price competition prevails throughout the market for the audits of publicly held companies, irrespective of the share of a market segment which is serviced by the Big Eight firms. The evidence is based on an examination of a sample cross-section of audit fees.