Pre and Post Big 8 Mergers: Comparison of Auditor Concentration.

Abstract This paper examines three issues raised by the two mergers of Big 8 accounting firms. First, the paper examines, through the use of concentration ratios and Herfindahl indices, the effects of the mergers upon concentration on NYSE, AMEX, and OTC companies. Second, concentration is examined on the basis of the audit fees of the major accounting firms. Third, the paper concludes with a discussion of the impacts of the mergers, both at the level of the individual firms involved, and at the level of the large client audit industry. The results indicate that the mergers resulted in increased concentration ratios, whether measured by the number of firms audited, client revenues, or audit fees, at the four, six, and eight firm levels. A comparison of the pre and post-merger four and six firm Herfindahl indices indicate fairly consistent movement toward the equal size (1/n) index. The eight firm Herfindahl indices indicate that the difference between the pre-merger Big 8 firms, and the largest eight firms today is significantly different. So, while the access to the market for audit services appears to be more balanced among the largest firms, the distinction between the first tier firms and other firms is greater than ever.