Beattie V, Goodacre A & Fearnley S (2003) And Then There Were Four: A Study of UK Audit Market Concentration - Causes, Consequences and the Scope for Market Adjustment. University of Stirling, Department of Accounting, Finance & Law, Discussion Paper, 03/03. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=389544
While concentration measures are a good indicator of market structure, the link with competitiveness is more complex than often assumed. In particular, the modern theory of industrial organisation makes no clear statement regarding the impact of concentration on competition - the focus of this paper is concentration and no inferences are made about competitive aspects of the market. The extent and nature of concentration within the UK listed company audit market as at April 2002 and, pro forma, after the collapse of Andersens is documented and analysed in detail (by firm, market segment and industry sector). The largest four firms held 90% of the market (based on audit fees) in 2002, rising to 96% with the demise of Andersens. A single firm, PricewaterhouseCoopers, held 70% or more of the share of six out of 38 industry sectors, with a share of 50% up to 70% in a further seven sectors. The provision of non-audit services (NAS) by incumbent auditors is also considered. As at April 2002 the average ratio of non-audit fees (paid to auditor) to audit fees was 208%, and exceeded 300% in seven sectors. It is likely, however, that recent disposals by firms of their management consultancy and outsource firms, combined with the impact of the Smith Report on audit committees will serve to reduce these ratios. Another finding is that audit firms with expertise in a particular sector appeared to earn significantly higher non-audit fees from their audit clients in that sector. The paper thus provides a solid empirical basis for debate. The subsequent discussion considers the implications for companies and audit firms of the high level of concentration in the current regulatory climate, where no direct regulatory intervention is planned.
auditor concentration; concentration ratios; audit firm mergers
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