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Competition in the Market for Assurance Services

posted on 29.08.2019 by Nam Ho
This dissertation examines the effects of competition in the market for accounting services. I focus on the unique attributes that characterize public accounting and investigate whether competition helps or harms audit quality. I find that audit quality is highest when markets have an intermediate level of competition. Insufficient competition provides monopolist auditors little incentive to expend effort to improving audit quality while too intense competition
erodes rents and pushes auditors to focus on alternate revenue streams, such as non-audit services. An oligopolistic market structure, with a small group of high quality audit firms, not only promotes healthy competition, that generates higher levels of audit quality, it preserves
some rents for the competing firms and depresses the use of non-audit services, a tool shown to negatively impact audit outcomes. Further, I find that the training system used for integrating new auditors into the industry works to reinforce the oligopolistic market structure. In the first chapter, I investigate the relationship between local competition and audit quality. I document empirically that audit quality does not follow monotonically with
competition. The highest levels of audit quality are produced within markets that are neither intensely competitive nor monopolistic. A balance between these two extremes forces auditors to expend effort to provide high quality audits while still be able to extract sufficient rents such that
their focus is not disproportionately shifted to more differentiated services. In the second chapter, I study the role that non-audit services play within an audit firm’s
product mix in competitive markets. I empirically show that auditors respond to intensifying competition by increasing their emphasis on, and selling more, non-audit services. My results suggest that audit firms utilize their non-audit offerings to differentiate themselves as well as
counterbalance reductions in audit fees. Additionally, my results show that the non-audit services old in competitive markets are more harmful to audit quality than those sold elsewhere. The results suggest that overly competitive audit markets push auditors to not only reduce their audit
pricing, but also increase their use of non-audit services that degrade audit quality. In my third chapter, I examine how labor enters into public accounting. Through a two period
matching model, I show how the centralized training of public accountants directs the flow of trained workers towards larger firms over smaller ones. This structure serves to further exacerbate the gulf between different tiers of public accounting firms, promoting an oligopoly in the output market. Over the long run, the model predicts that the growth of larger firms will outpace that of smaller firms. Smaller auditors will become boutique firms that cater to
specialized clients. Further, I find that the efficiency of labor matchings is determined by the distinguishability of outputs between different worker types. If the outputs of different worker types are not sufficiently heterogeneous, then larger firms will have the incentive to free-ride on
the training capacity of smaller firms. Fewer high ability workers will be trained by large auditors and overall audit quality will fall.




Degree Type



Tepper School of Business

Degree Name

  • Doctor of Philosophy (PhD)


Thomas Ruchti Jack Stecher