A Review of the Empirical Literature on Audit Market Concentration

Synopsis The research problem The extant audit market concentration (AMC) literature is quite scattered, which makes it challenging to comprehend the current state of knowledge and to highlight the areas that require further exploration. An improved understanding of AMC and its possible effects require a comprehensive review of the AMC literature, since no such review has yet been published. Therefore, our paper intends to: (a) synthesize the empirical work in the AMC literature; (b) determine the limitations in the ways AMC has been investigated; (c) identify avenues of inquiry that could guide future thinking on AMC; and (d) develop insights into how future AMC investigations can be further developed. Motivation The most noticeable developments in AMC occurred after the audit firm megamergers of the 1980s and 1990s and Andersen’s demise in 2002. This trend toward fewer and larger suppliers of auditing services has sparked intense debate about the costs and benefits of AMC. However, the literature provides mixed evidence on the determinants and consequences of AMC. Adopted methodology A structured literature review [Massaro, M., Dumay, J., substantial variations in how concentration was measured; and misguided use of proxies for audit competition and audit quality. The review identifies four key limitations that circumscribe our understanding of AMC: (a) the lack of investigation into the actual dynamic rivalry among audit firms; (b) great reliance on the positivistic approach and quantitative methods, and the lack of use of explicit theories aside from economic theories; (c) a focus on the audit of publicly listed companies in the United States, the U.K., and Australia; and thus; (d) the absence of key organizational settings and central regions in the AMC debate. To counter these limitations, this review puts forward possible future research avenues that can help to advance our understanding of AMC to address emerging challenges in the field.