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Abstract:

This study empirically examines competition among auditors, arguing that auditors behave as oligopolists. Based on prior economic theory (see Hotelling, 1929) using game-theoretic models to predict market outcomes in differentiated product oligopolies, we hypothesize that the audit fee is affected by an auditor’s relative location in a market segment. Competition is measured at local audit office level per U.S. state and an audit office’s location through product differentiation is measured as industry specialization (i.e. fee market share in a two-digit SIC industry) per U.S. state. We find that the presence of competitive auditors with a higher (lower) degree of industry specialization puts (removes) pressure on (from) audit fees. Our results suggest that auditors do compete on audit fees, but clients are willing to pay a premium for specialist auditors.