Competition Effects on Audit Quality and Pricing in a Non-Big 4 Market

Synopsis The research problem Adding to the literature on audit market competition, this study examined how increasing competition affects audit pricing and audit quality in an emerging market where regulatory policies have resulted in increased competition (less market concentration) in the audit market, and Big 4 auditors are banned. The test hypotheses H[Formula: see text]: Audit market concentration (competition) is positively (negatively) associated with audit fees. H[Formula: see text]: Audit market competition is associated with audit quality. Target population Various stakeholders including regulators, auditors, firm managers, and users of financial reports. Adopted methodology Multivariate analysis using ordinary least squares and logit regressions. Analyses Using the Herfindahl index to measure competition in the audit market at the national level, we used a sample of listed firms from the emerging Iranian audit market, which is characterized by increase in audit market competition as a result of a regulatory change and a lack of market concentration because the audit market does not include Big 4 audit firms or any dominant local audit firms to examine the impact of competition on audit pricing and audit quality. Findings We found that higher (lower) levels of audit market competition measured using the Herfindahl index are associated with lower (higher) audit fees and higher (lower) levels of abnormal accruals. These results suggest that increased competition in audit markets in developing economies generates audit fee pressure, which negatively affects audit quality.