Audit Market Segmentation –The Impact of Mid-Tier Firms on Competition

This analysis' goal is to characterize the impact of mid-tier auditors on competition and average supplied audit quality. The major result of our analysis is the following: Auditors' flexibilities with respect to clients' complexity determine the offered audit quality levels and thus the average supplied audit quality. Defining a model-endogenous quality measure, we show that for some instances the mid-tier auditor improves average audit quality, but for other instances fails to do so. The result could be of special interest for standard setters, e.g. the European Commission, which is currently revising EU audit regulation. Further, the analysis may serve as an instrument to analyze economic consequences of future changes of regulation