GROUP 2 PRESENTS

AN EMPIRICAL TEST
OF SPATIAL
COMPETITION IN THE

By Wieteke Numan and

Marleen Wilekens

BACKGROUNDS
As recently as October 2010, however, the questions of whether the
audit market is competitive and whether audit market concentration
is harmful were key topics of interest in a green paper issued by the
European Commission. Whether audit markets are indeed
competitive is an open empirical question, however, and the
implications of competitive conditions on audit pricing have been
largely unexplored
While prior studies investigate the quality effects of industry
specialization on audit pricing, to the best of our knowledge no
published empirical auditing study examines the competition
effects of industry specialization on audit pricing

OBJECTIVE
examines and distinguish the effects of competition through
specialized industry knowledge and/or market power effects due to
differentiation from competitors on audit Pricing

PRIOR AUDIT PRICING

STUDIES
SIMUNIC (1980), Model of audit industry competition based on
neoclassical economics in which the audit market consists of an
oligopolistic segment of large audit clients and a competitive segment
of small audit clients
CRASWELL (1995), FRANCIS (2005), DAN FERGUSON (2003), Typically
test the association between an auditor specialization variable (e.g., an
industry leader or specialist indicator variable) and audit fees)
Pearson and Trompeter, (1994), Bandyopadhyay and Kao (2004),
Willekens and Achmadi (2003), Feldman (2006), Investigate the
relation between audit fees and the level of audit market concentration,
where concentration is measured at the SIC code level

THE QUESTIONS
How the incumbent auditors location in the audit market affects
audit pricing?
How will audit fee be effected by market power due to
differentiation from the closest competitor as measured by the
distance between an auditors industry market share and that of its
closest competitor?

HYPOTHESES
I.

The audit fee charged by the incumbent auditor is increasing in

the alignment between the incumbent auditors differentiation
strategy and the clients auditor preferences

II. Ceteris paribus, the audit fee charged by the incumbent auditor
is increasing in the distance between the incumbent auditors
differentiation strategy and the differentiation strategy adopted
by its closest competitor

MODEL

Depende
nt

Independe
nt

THE REST ARE CONTROL VARIABLES

SAMPEL

REGRESSIONS
regression testing only for the effect of our measure of auditor
client alignment, (this test is similar to prior audit pricing studies
that investigate the effect of industry specialization in city markets)
regression testing our model for the effects of both auditorclient
alignment and distance to closest competitor
regression testing our model where we also include the interaction
between Distance_competitor and Industry portfolio share, thus
investigating whether the two constructs are independent from
each other

ROBUSTNESS CHECK
Regression results
Alignment_client

using

specialist

and

leader

to

proxy

for

Because
The Distance Competitor results in the main analysis are merely
capturing an audit quality instead of a competition effect on audit
pricing

CONCLUSIONS
The audit fee charged by the incumbent auditor is increasing in the
alignment between the incumbent auditors differentiation strategy,
the clients auditor preferences and the distance between the
incumbent auditors differentiation strategy and the differentiation
strategy adopted by its closest competitor

LIMITATIONS
1. our measure of auditorclient alignment may contain
measurement error as actual industry expertise is not directly
measurable from archival data
2. the relative small size of the city-industry market segments in
our sample could affect the measurement of the market share
distance variable

TERIMA KASIH