Int Adv Econ Res (2008) 14:485497 DOI 10.

1007/s11294-008-9167-6

Market Shares and Concentration in the EU Auditing Industry: the Effects of Andersens Demise
Apostolos A. Ballas & Irene Fafaliou

Published online: 9 August 2008 # International Atlantic Economic Society 2008

Abstract This paper describes and analyses changes at the concentration level of the audit services markets in 15-EU member-countries. The sample consists of 2,862 clients of auditing firms for the period 1998 to 2004. The findings of the research show that concentration in the aggregate sample increased over time. Concentration in the audit markets of the EU-15 member-countries exhibits substantial variation across countries while average concentration, before and after Arthur Andersens dissolution, has increased in 12 and declined in three countries. Results segmented by economic sectors indicate that the concentration increased in all sectors except Energy, which is the sector with the highest concentration. Overall, the empirical results suggest that there are complexities in our understanding of auditing services markets for competition purposes. Keywords Auditing industry . Market shares . Concentration JEL L10 . M00

Introduction In August 2002, following a traumatic loss of reputation caused by its involvement in the audit of Enron, Arthur Andersen collapsed. In most countries, Ernst and Young picked up the residual pieces. Thus, like a line from Agatha Christies Ten Little Indians, only four dominant international auditing firms (PriceWaterhouseCoopers,
The names of the authors are in alphabetic order since both have contributed equally to the project. A. A. Ballas Athens University of Economics and Business, Athens, Greece e-mail: aballas@aueb.gr I. Fafaliou (*) Department of Economics, University of Piraeus, 80 Karaoli & Dimitriou Str., 185 34 Piraeus, Greece e-mail: fafaliou@unipi.gr

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Ernst & Young, Deloitte & Touche, and KPMG) are left. This was the last incident in the consolidation in audit market raising once again worries about increasing market concentration and oligopoly in the field. Audit market concentration has been an issue to which several observers have paid close attention, especially since 1986. The 1987 merger of Peat Marwick International with Klynveld Main Goerdeler to form KPMG Peat Marwick reduced the market from the Big Eight to the Big Seven. In 1989, the merger trend continued when Ernst & Whinney joined Arthur Young and Touche Ross joined Deloitte, Haskins & Sells. These mergers reduced the competition even more in the audit market and created the Big Six out of the Big Seven. Even then, mergers did not stop. In 1998, the number of dominant players became five and in 2002, following Andersens dissolution, four. Increased concentration in the audit services market has led to worries about reduced competition and, therefore, higher prices and larger profits. In addition, market regulators became concerned with the competitive impact if one more, big, firm were to fail in the future. In all EU countries, there is a statutory requirement for the audit of the financial statements of listed companies. The 8th Company Law Directive (84/253/EEC of April 10th 1984) specifies the qualifications required for individuals who perform the statutory audits. These qualifications are, in effect, barriers to entry, which in a way protect established audit firms. In such a context, it is often claimed that the dominance of the market by large audit firms easily results in reduced competition and monopolistic pricing (Bain 1951, 1956). Industrial organization theory suggests, in a market dominated by a few big firms, there will be mis-allocated resources and sub-optimal industry performance. According to such perspectives, the main question is if mergers in the audit markets have raised the level of concentration, thereby leading to reduced competition, or if there is still considerable competition in the market. Ironically, during the early 1990s there were concerns that large audit firms were competing too aggressively and, indeed, the two mergers that produced the Big Six in 1989, were reported then as a market response to intense competitive pressures. At that time, it was widely assumed that excessive price competition among audit firms resulted in low-balling1 behavior and cross-subsidization against non-audit services. In addition, it was rumored client companies perceived a willingness on the part of audit firms to offer different interpretations of accounting standards, an attitude that encouraged opinion-shopping behavior by companies. However, no clear evidence exists to support such beliefs and perceptions. Previous studies of audit industry concentration mainly describe the market shares of the biggest audit firms and investigate the prevailing competitive conditions in terms of single country settings mainly in the USA, United Kingdom, and Australia. In contrast, the primary purpose of this paper is to explore the evolution of the structure of the audit markets in the EU-15 member-countries over the period from 1998 to 2004 before and after the demise of Andersen in 2002. The focus is on
1

Low-balling refers to the practice of initially charging a small fee in order to get a new client and, subsequently, raising it. It should be noted that a first-time audit is, comparatively speaking, very expensive and thus, switching auditors is not easy for companies. Thus, low-balling is clearly an anticompetitive behaviour.

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country-specific variations due to the existence of small auditing firms, local to many European countries. By examining auditing markets beyond the traditional ones, this study has the advantage over previous studies because it investigates regional variations in concentration levels. The results delivered also have significant policy implications because the EU is a single market with its own regulatory institutions. Consistent with previous studies (Danos and Eichenseher 1982; Dopuch and Simunic 1980; Eichenseher and Danos 1981; Loft and Sjfors 1993; Minyard and Tabor 1991; Wootton et al. 1994), this study uses the concentration ratio index to measure the level of the auditing market competition. Previous studies estimated concentration measures (the n firm concentration ratio, the HirschmanHerfindahl index, etc.) using a variety of definitions of audit markets such as the number of clients audited and the percentage of the summed natural logarithm of clients equity market values. Moizer and Turley (1987) have argued that concentration studies should use audit fees as the focus variable and that the use of surrogates tends to provide biased estimates of concentration measures. However, audit fee data is not disclosed by companies in most EU countries. For this reason, in this study we use the number of client companies to define market shares of auditing firms and evaluate competitive conditions of relevant markets.

Literature Review Market structure2 and its influence on welfare and allocation of resources is the central question of industrial organization. Given the importance of auditors in the relationship of companies with their shareholders and other interested parties, it is not surprising that the question of market structure has received a lot of attention. Beattie et al. (2003) were the first to point out that developments in industrial organization theory did not support the close link between market concentration and predatory behavior in the market for auditing services. Traditional industrial economics believes market structure (i.e. the numbers of competing firms and their market shares) is a causal determinant of market conduct (i.e. the extent and nature of price and non-price competition). Market conduct, in turn, determines economic performance, in particular, whether or not excess profits are earned through oligopolistic collusion or the exercise of monopoly power. Bains traditional formulation of the structureconductperformance paradigm explains the concerns about rising levels of audit market concentration. A great deal of merger analysis is still based on the analysis of market structure and concentration ratios, possibly because they are relatively easy to measure. Industrial economists, however, have moved away from claiming that a strict causal relationship exists between concentration and competition. Instead, they argue that, in equilibrium, concentration and performance are jointly determined by underlying cost and demand parameters. Under this view, the detrimental effects of rising concentration are less clear-cut. Moreover, the new industrial organization economics have brought
2

Market structure describes the characteristics and composition of markets and industry in the economy. It refers to the number and size distribution of firms in the market and the ease into (and exit from) the market.

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strategic issues to the fore front, emphasising the importance of barriers to entry and strategic interactions (Baumol et al. 1982; Porter 1985; Salop 1986). The modern industrial organization literature classifies markets into six broad types to provide a sense of the nature of competition in specific industries (Shepherd 1997). Although the description used is somewhat arbitrary, it is suggested there might be three market types which are characterised by high market power and generally ineffective competition: a monopoly where one firm has 100% of the market, a dominant firm where one firm has 40% to 99% of the market, and a tight oligopoly where four firms have over 60% of the market. The other three market types refer to effective competition conditions: loose oligopoly where there are four firms having less than 40%, monopolistic competition when there are many competitors each with a slight degree of market power, and pure competition where there are many competitors, none of whom has market power. The aforementioned description would certainly match with the current EU view of the auditing services with the tight oligopoly model. Auditor Concentration Studies There have been a few prior studies examining the concentration in the market for auditing services, including the 1990s studies dealing with the effect of the audit firms mergers. The first study on this issue is an examination by Minyard and Tabor (1991) on the effect of the mergers among the Big Eight firms at the concentration level in the U.S. The authors conclude that the mergers may have had little, if any, impact on competition within the market structure for auditing services provided by large firms. Wootton et al. (1994) also examine the impact of the Big Eight mergers on the concentration of firms listed on the New York Stock Exchange (NYSE), the American Stock Exchange (ASEX), and the Over the Counter Market (OTC). They find that concentration ratios have increased over time. Loft and Sjfors (1993) investigate some aspects of the consequences of the merger activities among the Big Eight firms in Sweden and Denmark. Their findings reveal, because of the mergers, concentration in the auditing market substantially increased in both countries. More recently, Choi and Zenghal (1999) examined the effect of accounting firms mergers on international markets for accounting services and found that large firms dominated the market before the mergers and this dominance was extended further following the mergers. This was particularly noticeable in the European market, excluding the UK. Choi and Zenghal also compared the financial performance of large and small auditing firms. They concluded that large auditing firms had significantly superior performance both before and after the mergers in some European countries. This result may be interpreted as a sign of reduced competition. Performance of large and small firms did not significantly differ also in several other countries, suggesting high levels of large companies concentration do not necessarily entail low levels of competition. Finally, Beattie et al. (2003) studied the UK auditing market concentration and found that the largest four firms held 90% of the market (based on audit fees) in 2002, and this rise to 96% with the demise of Andersen. A disadvantage of their study is that it focused on the very short-term effects of Andersens dissolution giving the market very little time to settle in a new concentration level.

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Methodology This empirical research examines auditor concentration from the viewpoint of client companies domiciled in any of the 15 EU member countries before the 2004 accession.3 The rationale for this choice of audit markets is the EU-wide auditing regulations (8th Company Law Directive) while the European Commission has substantial power to regulate competition policy. Furthermore, in doing so we are able to examine whether there is indeed (in real terms) a single market in auditing services. The data used for the present study was initially based from the Standard & Poors Global Vantage Database.4 Data items retrieved from this source include: (a) the name of the audit firm and (b) characteristics of the client company (i.e. domicile, economic sector, total income, book value of equity, and market capitalization). The client companies selected for the sample were all companies contained in the database with a December year-end. Data for 2,862 client companies were extracted covering fiscal years 19982004. Observations referring to years for which a company was not audited5 were dropped from the sample. This left 18,209 company-year observations, out of which 3,135 were for company-years audited by a second auditor as well. These joint audits were allocated equally to the audit firms concerned. Statistics for the number of observations for each combination of country and economic sector are provided in Table 1. It should be noted that three sectors6 (Energy, Telecommunication Services and Utilities) are substantially smaller than the other seven industries. Many client companies (approximately 33% of total audits) in the Compustat database were listed as being audited by another auditor (the auditing firm classified in this category was not identified and thus it was assigned the code 09). These other auditors are mainly auditing firms that specialize in local markets. To identify these auditing firms, the client companies websites (if available) were searched to locate financial statements and identify the auditor. In the case that these local auditing firms were affiliated to a multinational one, we assigned them the specific code of the parent firm. Following these searches, the number of observations in the sample for which the auditor remains unidentified was reduced to approximately 18.4%. Table 2 shows the number of audits performed by each of the ten most active auditing firms in the sample and the market shares obtained. As it can be seen in Table 2, the Big-4 international auditing firms (Ernst & Young, Delloitte & Touche, KPMG and PriceWaterhouseCoopers) command a

These countries are (in alphabetical order): Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and United Kingdom. The Global Vantage Database is available at the Library of the Athens University of Economics & Business (AUEB) This may occurred for various reasons: change of companys name, merger, acquisition etc.

5 6

The economic and industrial sectors classification used in this study is the one employed by the COMPUSTAT research database which differs from SIC Codes.

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Table 1 Number of audits over the period 19982004 classified by country and sector

Country Energy 14 0 0 7 48 0 11 28 19 7 14 0 20 16 136 320 117 165 361 78 552 689 65 33 390 36 218 38 220 253 732 3.947 0 19 65 13 130 204 18 7 35 6 33 0 28 136 155 849 98 94 205 200 668 895 97 35 281 18 341 48 168 397 806 4.351 29 71 39 151 483 664 19 19 97 6 102 13 28 395 291 2.407 35 99 34 96 246 277 84 40 92 10 66 73 137 147 185 1.621 7 10 7 13 48 54 19 0 25 7 23 12 12 35 14 286 13 20 13 4 38 86 19 0 92 8 0 7 54 0 21 375 Financials Health Care Industrials Information Technology Materials Telecom Services Utilities

Sector Total 385 658 870 707 2.977 3.643 464 214 1.398 124 1.057 248 852 1.628 2.984 18.209

Consumer Discretionary

Consumer Staples

Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom Total

52 101 105 105 499 599 75 25 315 26 155 36 110 203 506 2.912

20 79 41 40 265 175 57 27 52 0 105 21 75 46 138 1.141

A.A. Ballas, I. Fafaliou

Market Shares and Concentration in the EU Auditing Industry Table 2 Audit firm market shares (aggregate sample, period 19982004) Auditor Number of Audits 973 2,865 2,095.5 3,223 3,685 271.5 274 151 144.5 Total Market Share (%) 5.35 15.71 11.50 17.73 20.28 1.48 1.50 0.83 0.79 Market Share Before Andersens Dissolution (%) 9.26 14.58 8.43 17.84 20.36 1.26 1.37 1.06 0.87

491

Market Share After Andersens Dissolution (%) 0.15 17.22 15.61 17.60 20.17 1.76 1.68 0.51 0.69

Arthur Andersen Ernst & Young Delloitte & Touche KPMG PriceWaterhouseCoopers BDO Grant Thornton Mazars & Guerard SOL SA

substantial market share. It is interesting however, two local firms, the French Mazars & Guerard and the Greek SOL SA, command such a significant market share in their respective markets that they have a noticeable market share even at a Europe Union-wide level. To examine concentration levels, we calculated concentration ratios (CR) for the top four auditing firms in each market segment under review. The concentration ratio (CR) measures the market share of the top N firms in an industry where N is normally taken to be 3, 4 or 8. Since the number of dominant firms internationally has been reduced to four, in this study the CR4 is used and is defined as: CR4
4 X i1

Xi

where Xi is the market share of firm i. All concentration ratios were calculated using market shares based on the number of company clients (as a proxy for audit fees). We also tested (at the aggregate level) for alternative definitions of the market using such proxies for audit fees as the log of book value of equity and the log of sales of the client firms. Differences proved to be trivial. In our analysis, we include in the denominator of the concentration ratio (market size) client companies audited by other auditors. However, these are not included in the numerator among the top firms because this category refers to more than one firm. Results for the concentration ratio were calculated for every year separately, and segmented by country and by sector classifications. Finally, given our interest in market concentration before and after Andersens collapse, we compare average concentration before (19982001) and after (20022004) this event.

Results In the next three sections, we present results for the concentration in the EU-15 market for auditing services, initially in the aggregate sample and then segmented by country and sector.

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EU-15 Wide Results Results for the 4-firm concentration ratio, for the 7 years under investigation in the aggregate sample, appear in Table 3. EU-15 wide results are policy relevant because the EU, for policy reasons, is considered a single market. Strictly speaking, this is not the case in the services market since auditing firms in each country are distinct legal entities operating in accordance to the statutes of each member state. However, there is close cooperation and coordination of the activities of the local subsidiaries of multinational auditing firms while, as noted in the introduction, EU authorities have developed a common regulatory framework for the statutory audit of the financial statements of big companies in the member states. In Table 3, it can easily be observed that the concentration ratio (CR4) in the full sample increased from 63% in 1998 to 73.7% in 2004; the average concentration ratio for the period before (19982001) and after Andersens dissolution (2002 2004) has increased substantially from 62% to 70.6%. Concentration increased, albeit only slightly, even looking at the concentration ratio of the five biggest firms (including A. Andersen) for the period before 2002 (70.4%) and comparing it to the CR4 (70.6%) for the period after Andersens dissolution. Thus, the dominance of the larger auditing firms was extended after the forced withdrawal of Andersen. This tight oligopoly has obvious implications, well known in the industrial relations literature: possible monopolistic pricing or a decline in the quality of audits and other services provided by audit firms. However, it is claimed in the literature that previous accounting firm mergers have raised the level of concentration, thereby leading to an increase of the competition in the market because the firms become more comparable in size and market shares as a result of the mergers (Choi and Zenghal 1999). A more important effect, as a policy issue, is that the remaining Big Four auditing firms may have become too big too fail. Auditors act as guarantors of the quality of the financial statements of client firms; were one more major audit firm to fail, it may trigger a crisis in the confidence of investors about financial statements which will have a significant impact in the capital markets. Results for the aggregate sample may well hide particularly dominant positions of specific auditing firms in specific market segments. For this reason, the next two
Table 3 Evolution of concentration in the E.U.-15 market for auditing services over time (aggregate sample) Year 1998 1999 2000 2001 2002 2003 2004 Mean Before Andersens dissolution After Andersens dissolution CR4 (%) 63.0 62.5 62.1 60.6 69.2 69.0 73.7 65.7 62.0 70.6

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sections, examine developments in the concentration level in each individual country and then consider whether there are specific effects by economic sector. Results by Domicile of Client Companies Results for the development of concentration in the market for auditing services for each country separately, over time, are presented in Table 4. Also reported is the average concentration over the whole sample period (19982004) as well as before and after the dissolution of Andersen. Results presented in Table 4 indicate that there is substantial variation in the concentration ratio across countries. Indeed, an analysis of variance test suggests that differences in average concentration across countries are statistically significant at the 5% level. The markets with the highest concentration are Luxemburg and Spain where the top four firms command an average 90.2% and 89.7% market share. The markets with the lowest concentration are France (49.2% on average) and Germany (47.7% on average). Thus, in most countries the market for auditing services can be described as a tight oligopoly and only in France and Germany as a loose oligopoly. The relatively low level of concentration in Germany and France can be explained by the large number of client companies being audited by small, local, auditing firms which, in the case of Germany, also provide tax services. Statistics for the average concentration ratios before and after Andersens collapse are presented in Table 4. Comparing average concentration in the 15 EU countries before and after Andersens dissolution, we observe that concentration increased in 12 countries and declined in three of them. It is interesting that in France concentration appears to be declining while in Germany it has increased. A crucial difference between the two countries is the German regulatory reforms that have given prominence to conformance with US and international accounting rules (International Financial Reporting Standards) causing the market share of very small auditing firms to decrease. Such changes are expected to affect all European markets from the fiscal year 2005 onwards. Finally, it should be noted that PriceWaterhouseCoopers (PWC) is the auditing firm with the biggest market share over the period studied across the 15 EU countries studied. This is due to its market share in four countries (Finland, Netherlands, Sweden and the United Kingdom). The second biggest auditing firm, KPMG, has the biggest market share in two countries (Austria and Germany). In Italy and Spain, Andersen had the biggest market share up to the time of its dissolution and, after its implosion, the dominant auditing firm became Delloitte & Touche. Ernst & Young has the biggest market share in France. Greece is a particularly interesting case where the share of the Big-4 international auditing firms increased because of the shrinking market share of SOL SA, a local firm that until 1992 was a legally sanctioned monopoly in the market for statutory audit services. Results by Economic Sector of Client Companies Results for the 4-firm concentration ratio segmented by economic sector appear in Table 5. Also reported is the average concentration over the whole sample period

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Table 4 Audit firms concentration ratios (CR4): by country analysis Germany (%) 44.8 44.5 43.3 42.8 47.3 53.8 57.5 47.7 43.8 52.9 59.5 58.7 64.6 66.4 72.2 73.6 74.4 67.0 62.3 73.4 79.3 76.7 81.3 78.1 90.6 86.0 92.6 83.5 78.8 89.3 84.5 80.2 80.0 75.1 92.3 92.0 92.8 85.3 79.9 92.3 100.0 82.4 89.5 80.0 89.5 100.0 90.0 90.2 88.0 93.2 87.0 83.2 81.2 83.8 90.5 90.3 91.3 86.7 83.8 90.7 53.2 61.4 55.6 52.6 55.4 63.5 72.1 59.1 55.7 63.7 86.4 85.7 90.2 88.9 92.9 92.2 91.6 89.7 87.8 92.2 79.7 83.0 88.5 85.9 89.4 89.7 90.6 86.7 84.3 89.9 Greece (%) Ireland (%) Italy (%) Luxembourg (%) Netherlands (%) Portugal (%) Spain (%) Sweden (%) United Kingdom (%) 77.0 77.5 77.3 78.5 85.3 80.1 84.6 80.0 77.3 83.3

Austria (%)

Belgium (%)

Denmark (%)

Finland (%)

France (%)

1998 1999 2000 2001 2002 2003 2004 Mean Before After

50.0 51.9 59.4 52.6 50.0 54.2 72.6 55.8 53.5 58.9

61.6 60.2 61.5 57.4 68.4 66.8 62.4 62.6 60.2 65.9

77.7 72.8 69.8 72.4 70.8 71.2 69.2 72.0 73.2 70.4

82.4 82.0 80.9 79.5 76.4 78.8 79.7 80.0 80.3 78.3

57.5 55.9 50.0 49.8 46.6 40.5 43.8 49.2 53.3 43.7

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Table 5 Audit firms concentration ratios (CR4): by sector analysis Financials (%) 66.5 67.5 66.2 82.6 69.8 67.9 77.0 71.1 70.7 71.6 60.7 62.0 59.4 60.7 64.6 69.4 70.7 63.9 60.7 68.2 63.4 62.4 60.6 70.4 71.5 71.5 76.5 68.1 64.2 73.2 61.7 60.2 61.6 59.0 63.9 65.0 66.2 62.5 60.6 65.0 65.3 62.9 63.0 60.6 70.4 71.5 76.5 67.2 63.0 72.8 70.7 63.2 69.8 64.8 68.5 76.7 80.5 70.6 67.1 75.2 Health Care (%) Industrials (%) Information Technology (%) Materials (%) Telecom. Services (%) Utilities (%) 64.8 65.1 59.1 60.4 76.3 80.9 85.9 70.3 62.3 81.0

Year 87.5 90.9 88.9 89.4 81.6 82.7 84.8 86.5 89.2 83.0

Consumer Discretionary (%)

Consumer Staples (%)

Energy (%)

Market Shares and Concentration in the EU Auditing Industry

1998 1999 2000 2001 2002 2003 2004 Mean Before After

63.2 59.4 59.8 58.0 68.3 66.7 69.2 63.5 60.1 68.0

62.3 64.1 61.2 60.1 69.9 64.7 72.1 64.9 61.9 68.9

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(19982004) as well as before and after the dissolution of Andersen. As in the case of the analysis by country, there is substantial variation in the concentration ratio among industrial sectors. Indeed, an analysis of variance test suggests that differences in average concentration across sectors are statistically significant at the 5% level. The sector with the highest average concentration (over the full sample period) is Energy with a 86.5% CR. Dopuch and Simunic (1980) concluded that as the size of companies decreased, their likelihood to choose a major firm as their auditor also decreased. Given that a small number of firms, with very high average capitalization, compose the Energy sector, it is reasonable that it is also a sector with high concentration. Indeed, there is weak but positive correlation between the average market value of the firms in a sector and concentration levels. Statistics for the average concentration ratios before Andersens collapse are presented in Table 5. Concentration in almost all sectors increased following Andersens dissolution with Energy being the only sector that concentration decreased (on average). An analysis of which auditing firm has the biggest market share in each sector provides evidence of specialization, i.e., specific auditing firms focus on significant sectors. This can be interpreted as evidence of audit firms differentiation strategies. PWC has the biggest market share in the case of Consumer Staples, Health Care, Industrials and Materials sectors, KPMG in the Consumer Discretionary and Financials sectors while Ernst & Young in the Energy and Information Technology sectors. Andersen had the biggest market share in the Telecommunication Services and Utilities sectors but after its demise, it was succeeded by Ernst & Young and Delloite & Touche, correspondingly.

Concluding Remarks This study has examined the impact of the demise of the house of Andersen on the market for accounting services in EU-15 countries. The typical range of concentration measures indicates large accounting firms in the sample countries dominated the market before 2002, but they have extended their dominance further since then. The analysis in this paper is limited in certain ways. First, the data used is about public companies and therefore there is no information about large, private, companies for which there also is a statutory auditing requirement. In addition, the sector classification is very broad and it is impossible to identify if, in any specific market segment, there is a single dominant auditing firm. Finally, the analysis is based on the concentration ratio index (CR4), which suffers from a number of weaknesses which are well known in the industrial economics literature, such as that its lack of information about all firms in an industry and the market shares of all firms is equally weighted (Cowling et al. 2000). Thus, this study can be further extended by investigating the sensitivity of the results to the market definition (number of clients) by using alternative proxies such as market capitalization, and, perhaps, by using alternative concentration measures,

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such as the modified Herfindahl index7 proposed by Minyard and Tabor (1991) in their study of the US auditing industry. Another promising area for further research involves collecting additional data to further reduce the number of unidentified auditors.

References
Bain, J. S. (1951). Relation of profit rate to industry concentration: American manufacturing, 19361940. The Quarterly Journal of Economics, 65(3), 293324. Bain, J. S. (1956). Barriers to new competition. Cambridge, MA: Harvard University Press. Baumol, W., Panzar, J., & Willig, R. D. (1982). Contestable markets and the theory of industry structure. San Diego, CA: Harcourt Brace Jovanovich. Beattie, V., Goodacre, A., & Fearnley, S. (2003). And then there were four: A study of UK audit market concentrationCauses, consequences and the scope for market adjustment. Journal of Financial Regulation and Compliance, 11(3), 250265. Choi, M. S., & Zenghal, D. (1999). The effect of accounting firm mergers on international markets for accounting services. Journal of International Accounting, Auditing & Taxation, 8(1), 122. Cowling, K., Yusof, F. M., & Vernon, G. (2000). Declining concentration in UK manufacturing? A problem of measurement. International Review of Applied Economics, 14(1), 4554. Danos, P., & Eichenseher, J. (1982). Audit industry dynamics: Factors detecting changes in client industry market shares. Journal of Accounting Research, 20(2), 604616 Autumn. Dopuch, N., & Simunic, D. (1980). The nature of competition in the auditing profession: A descriptive and normative view. In J. W. Buckley, & J. G. Weston (Eds.), Regulation and the accounting profession (pp. 7794). Belmont, CA: Lifetime Learning. Eichenseher, J., & Danos, P. (1981). The analysis of industry-specific auditor concentration: Towards an explanatory model. The Accounting Review, 56(3), 479492 July. Loft, A., & Sjfors, A. (1993). Audit concentration in Sweden and Denmark: A comparative analysis. The European Accounting Review, 2, 155175. Minyard, D., & Tabor, R. (1991). The effect of Big Eight mergers on auditor concentration. Accounting Horizons, 5(4), 7990 December. Moizer, P., & Turley, S. (1987). Surrogates for audit fees in concentration studies. Auditing: A Journal of Practice & Theory, 7, 118123 Fall. Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press. Salop, S. C. (1986). Practices that (Credibly) facilitate oligopoly coordination. In J. Stiglitz, & F. Mathewson (Eds.), New developments in the analysis of market structure (pp. 265290). Cambridge, Mass: The MIT. Shepherd, W. G. (1997). The economics of industrial organization (4th ed.). New Jersey: Prentice-Hall International. Wootton, C., Tonge, S., & Wolk, C. (1994). Pre and post Big 8 mergers: Comparison of auditor concentration. Accounting Horizons, 8(3), 5874 September.

The adjusted Herfindahl Index is calculated as follows: HHI adj

N X i1

Xi2

1 N

where Xi is market share and N is the number of auditing firms. In our case, N is 4.