The Influence of Audit Market Concentration on Competition and Quality of Audit Services

Posted: Dec 11, 2022

• Rowan Bishop
• Ella Gibson
• Annalise Barrett

Abstract

The structure of audit markets and its implications for competition and service quality represents a fundamental concern for financial regulators, policymakers, and market participants worldwide. Over recent decades, the global audit market has experienced significant consolidation, with the Big Four accounting firms—Deloitte, PwC, EY, and KPMG—dominating the landscape for large publicly traded companies. This concentration has sparked intense debate regarding its effects on audit quality, with competing theoretical perspectives predicting both beneficial and detrimental outcomes. Proponents of concentration argue that scale economies, specialized expertise, and robust quality control systems in larger firms enhance audit quality, while critics contend that reduced competition diminishes auditor independence, innovation, and responsiveness to client needs. Traditional empirical approaches to this question have relied predominantly on linear regression models examining the relationship between concentration metrics and various audit quality proxies. These studies have produced inconsistent findings, with some indicating positive associations between concentration and quality, others revealing negative relationships, and still others finding no significant connection. This empirical ambiguity suggests that the relationship may be more complex than previously conceptualized, potentially involving non-linear dynamics, contextual moderators, and bidirectional causal pathways. Our research addresses these limitations through a novel methodological framework that integrates three complementary analytical approaches: dynamic network analysis to capture the evolving structure of auditor-client relationships, multi-agent simulation to model strategic interactions under varying market conditions, and machine learning techniques to identify complex patterns in audit outcomes.