The Impact of Audit Market Concentration on Audit Quality: Evidence from Australia

Abstract

This study examines the impact of audit market concentration on audit quality (that is, audit fees, earnings management (discretionary accruals), and going concern opinion) in Australia. The analysis is crucial given ongoing concerns and uncertainty regarding the precise nature of the link between audit market concentration and audit quality. Furthermore, this analysis is necessary to determine whether current regulation is adequately prepared to improve audit quality in a highly concentrated audit market, or whether new regulations are required to improve audit quality. The hypotheses are developed within an agency theory framework and tested using data collected from publicly listed Australian firms for the period from 2010 to 2018. The sample for this study consists of 11,295 firm-year observations for the audit fees and earnings management models. In contrast, the going concern opinions model contains only the firms in financial distress, with a sample of 8,268 firm-year observations. This research contributes to the current literature by offering new and significant empirical insights into the relationship between audit market concentration and audit quality. The results of this study suggest that audit market concentration is positively associated with audit quality. Additionally, robustness and sensitivity test findings largely support the significance of the association between audit market concentration and audit quality. The findings of this study have significant implications for regulators, investors, scholars, corporate management, and auditors concerning the significance of audit market concentration in improving audit quality.