Imperfect competition in audit markets and its effect on the demand for audit-related services

Article Abstract:

Cost differences across auditors and the possible diminution of an incumbent auditor's competitiveness are modelled. It is shown that when the incumbent auditor uses the cost differences among accounting firms as a source of economic rents, the costs of switching from one auditor to another, which were earlier identified as the source of the auditor's rents, may actually serve to diminish the auditor's rents to the advantage of the client. This finding has significant implications concerning the influence of switching costs on the structure of audit engagements and on the investment of clients on their relationships with auditors. Because of imperfect competition, the resulting behavior may seem inefficient or questionable. Some examples of such behavior are the clients' low investment in their accounting systems and their acceptance of their existing auditor's services even though another firm has offered the same services for a lower price.

Accounting & Auditing Services, Accounting, Tax Preparation, Bookkeeping, and Payroll Services, Supply and demand, Monopolistic competition

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Auditor credibility and initial public offerings

Article Abstract:

The credibility auditors bring to audit engagements is considered to be a factor that differentiates the audit report. Auditor credibility was researched in relation to initial public offerings (IPO). It has been postulated that the need for credibility by firms undertaking an IPO necessitates that they select reputable auditors, that is, auditors associated with a Big Eight accounting firm. An empirical evaluation was performed on firms that had IPOs during 1985 and 1986. Research results reveal few auditor changes prior to the IPOs. Among those firms that undertook changes in auditors, there was a preference for more credible auditors. Firms with more prestigious investment bankers showed a greater tendency to substitute more credible auditors for local auditors.

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Auditor reputation and the pricing of initial public offerings

Article Abstract:

Two proxies for auditor reputations are used to test the hypothesis that clients that use more reputable accounting firms should have lower initial returns in public offerings than clients that select accounting firms with less reputation capital at stake. One reputation proxy utilizes indicator variables for auditor size, while the second reputation proxy examines compensation paid to auditing firms on measures of marginal cost of performing the audit. Research results indicate that clients who pay a high price for their registration audit seem to have lower initial returns for investors, providing support for the idea that there is an inverse relation between initial return on public offerings and auditor reputation set forth in the hypothesis.

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