International audit firms as strategic networks — the evolution of global professional service firms

Abstract

The evolution of large international audit firms was driven by client needs and legal regulations specific for the audit industry. The organizational structure of these professional service firms can be characterized as a specific form of a strategic network. The national member firms have to adapt to their different legal, cultural, and economic national environment. In particular, the legal rules in the audit sector establish barriers of entry for foreign competitors and prevent more common forms of market entry, e.g. the acquisition of another audit firm or the establishment of a subsidiary in a foreign country. Networks of audit firms are a prime example of hybrid governance structures between markets and hierarchies and are organized by contractual relationships between legal and economically autonomous partnership entities from different countries. These networks are controlled by a committee structure. Strategic decisions are made by one or more lead firms. This article describes the governance structure of international audit firm networks. Furthermore, we analyse how coordination and incentive problems, e.g. hold-up and moral hazard situations are dealt with in these network structures. Exclusive rights, referral work, brand names, network-specific investments, and profit pooling are means to ensure that network members cooperate.