Academic journal article International Advances in Economic Research

Market Shares and Concentration in the EU Auditing Industry: The Effects of Andersen's Demise

Academic journal article International Advances in Economic Research

Market Shares and Concentration in the EU Auditing Industry: The Effects of Andersen's Demise

Article excerpt

Abstract This paper describes and analyses changes at the concentration level of the audit services markets in 15-EU member-countries. The sample consists of 2,862 client of auditing firms for the period 1998 to 2004. The findings of the research show that concentration in the aggregate sample increased over time. Concentration in the audit markets of the EU-15 member-countries exhibits substantial variation across countries while average concentration, before and after Arthur Andersen's dissolution, has increased in 12 and declined in three countries. Results segmented by economic sectors indicate that the concentration. Overall, the empirical results suggest that there are complexities in our understanding of auditing services markets for competition purposes.

Keywords Auditing industry * Market shares * Concentration

JEL L10 * M00


In August 2002, following a traumatic loss of reputation caused by its involvement in the audit of Enron, Arthur Andersen collapsed. In most countries, Ernst and Young picked up the residual pieces. Thus, like a line from Agatha Christie's "Ten Little Indians," only four dominant international auditing firms (PriceWaterhouseCoopers, Ernst & Young, Deloitte & Touche, and KPMG) are left. This was the last incident in the consolidation in audit market raising once again worries about increasing market concentration and oligopoly in the field.

Audit market concentration has been an issue to which several observers have paid close attention, especially since 1986. The 1987 merger of Peat Marwick International with Klynveld Main Goerdeler to form KPMG Peat Marwick reduced the market from the Big Eight to the Big Seven. In 1989, the merger trend continued when Ernst & Whinney joined Arthur Young and Touche Ross joined Deloitte, Haskins & Sells. These mergers reduced the competition even more in the audit market and created the Big Six out of the Big Seven. Even then, mergers did not stop. In 1998, the number of dominant players became five and in 2002, following Andersen's dissolution, four. Increased concentration in the audit services market has led to worries about reduced competition and, therefore, higher prices and larger profits. In addition, market regulators became concerned with the competitive impact if one more, big, firm were to fail in the future.

In all EU countries, there is a statutory requirement for the audit of the financial statements of listed companies. The 8th Company Law Directive (84/253/EEC of April 10th 1984) specifies the qualifications are, in effect, barriers to entry, which in a way protect established audit firms. In such a context, it is often claimed that the dominance of the market by large audit firms easily results in reduced competition and monopolistic pricing (Bain 1951, 1956).

Industrial organization theory suggests, in a market dominated by a few big firms, there will be mis-allocated resources and sub-optimal industry performance. According to such perspectives, the main question is if mergers in the audit markets have raised the level of concentration, thereby leading to reduced competition, or if there is still considerable competition in the market.

Ironically, during the early 1990s there were concerns that large audit firms were competing too aggressively and, indeed, the two mergers that produced the Big Six in 1989, were reported then as a market response to intense competitive pressures. At that time, it was widely assumed that excessive price competition among audit firms resulted in low-balling (1) behavior and cross-subsidization against non-audit services. In addition, it was rumored client companies perceived a willingness on the part of audit firms to offer different interpretations of accounting standards, an attitude that encouraged opinion-shopping behavior by companies. However, no clear evidence exists to support such beliefs and perceptions. …

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