Lucky Or Good? Audit Market Concentration And The Emergence of The Big 4 In Australia

We use a long time-series from Australia to investigate the determinants and (to a lesser extent) consequences of audit market concentration. We show that increasing skewness in the size of public companies is associated with increased audit market concentration, and that the growth of the large audit firms is largely due increases in the size of a small number of their public company clients rather than to mergers and acquisitions. Our evidence also shows that a simple growth/economies of scale argument cannot fully explain market concentration: median audit firm size, a common measure of minimum efficient scale, is flat to declining as the size of the market increases. The emergence of the Big N is also associated with a number of differences (relative to non-Big N firms) that occur around the time the profession first allowed audit firms to advertise and promote their services. These differences include increases in staff-to-partner ratios, lower ratios of audit fees to client assets, industry specialization, and growth in the provision of nonaudit services, all of which suggests that Big N firms made sunk cost investments that helped them to differentiate their services and expand. We also show that the change in regulation of advertising led to increased client switching and realignment. We find no evidence that the audit market became less competitive as concentration increased; for example, audit fees decline for both Big N and non-Big N firms during economic downturns. While largely descriptive, our evidence offers important new insights into what led to audit market concentration and the differentiating characteristics of Big N firms