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By Lia Samson
Eller MBA ’13

Should regulators be concerned about the high market share of the “Big Four” audit firms?

Paul Michas

Assistant Professor of Accounting Paul Michas.

Assistant Professor of Accounting Paul Michas took interest in this question during his doctoral program at the University of Missouri-Columbia. One of his instructors, Jere Francis, and Scott Seavey of the University of Nebraska were looking into the effect of audit market concentration on audit quality in the United States. Michas wanted to explore this topic in a global context. “I was very interested in combining audit with international topics,” he explained.

What began as a project in a doctoral seminar developed into a deeper study as Michas began to perceive a lack of research in international auditing. “I saw an opportunity to make a mark in a part of the audit research field that is still in its beginning stages,” he said.

As the Big Four audit firms (Deloitte, KPMG, Ernst & Young, and PricewaterhouseCoopers) expand their respective global footprints, regulators and researchers want to note the impact these firms have on each country’s audit quality. “There is specific concern among regulators in various countries that the ‘Big Four’ audit firms enjoy too high a market share,” said Michas. “This seemed like a perfect topic for a researcher to analyze empirically to provide independent evidence to regulators that may affect their decisions on how to deal with this perceived problem.”

After examining 42 countries, Michas and his colleagues concluded that countries have better audits where the Big Four have a strong presence. Businesses that desire high-quality audits typically demand the services of the Big Four because of their strong reputations. While the four audit firms are competing with each other, there is no incentive to risk marring their reputation by reducing the quality of their services to save on costs.

The researchers conclude that a regulation-enforced reduction of the Big Four’s market share may have the opposite effect of the regulation’s intent. The evidence suggests that in countries where smaller firms hold a high share of the audit market, overall quality is lower. Therefore, forcefully giving small firms a higher share may impair the availability of firms that can perform good audits.

The paper, which is forthcoming in Contemporary Accounting Research, offers guidance to regulators in two areas: 1) Big Four dominance is not a concern for overall audit quality; and 2) imbalance of each company’s market share within the Big Four may negatively impact quality. “Regulators should focus on this balance, rather than increasing the share of small firms,” said Michas.

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