City Markets as a Unit of Analysis in Audit Research and the Re-Examination of Big 6 Market Shares

Big 6 audit market shares based on aggregate national data have been used in prior research to infer market leadership and industry expertise, and to differentiate Big 6 accounting firms from one another. In this study it is demonstrated that further differences exist with respect to city-specific audit markets, both between firms and within the same firm across different city markets. The specific finding is that the national market leader is not the city-specific market leader the vast majority of time. Usefulness of the city-level unit of analysis is further demonstrated by re-examining the 1989 mergers creating the accounting firms Ernst amp; Young and Deloitte Touche. The primary effect of the Ernst amp; Young merger was to increase audit market shares in cities in which the pre-merger firms already had significant market shares, resulting in an increase in the number of cities the merged firm achieved top ranking. In contrast the primary effect of the Deloitte Touche merger was an expansion of the number of city-level markets in which the merged firm had significant (though not leading) audit market shares. The findings of this study suggest that in order to move beyond our current understanding, important audit research questions such as the reason for particular auditor-client alignments, the competitive nature of markets, audit pricing of reputations, and auditor reporting and independence issues should be investigated in city-level markets where audit contracting occurs and where Big 6 market shares (and presumably reputations) vary widely from city to city