Does a Lack of Choice Lead to Lower Quality? Evidence from Auditor Competition and Client Restatements

TLDR

Stakeholders worry that low auditor competition harms audit quality. The study investigates how auditor competition relates to the probability of GAAP‑related financial restatements. We find that higher auditor competition is associated with a greater likelihood of restatements, a statistically and economically significant positive relationship that informs the audit quality debate.

Abstract

SUMMARY: We examine the relationship between auditor competition and the likelihood of financial restatements that occur as a result of failures in the application of generally accepted accounting principles (GAAP). Policy makers and audit market participants have expressed concern that the current level of auditor competition is low, resulting in a negative impact on audit quality. However, we find that restatements are more likely to occur in metropolitan statistical areas (MSAs) that have higher auditor competition. The association between audit market competition and restatements is statistically and economically significant. Our finding of a positive relationship between the likelihood of restatement and audit market competition is relevant to the ongoing debate regarding audit quality and the concentration of audit markets.