The effect of audit market structure on audit quality and audit pricing in the private-client market

Abstract

This study examines whether audit market structure affects audit quality and audit pricing. We analyze two conceptually distinct dimensions of market structure: audit market concentration and client mobility. Focusing on the private-client segment of the Belgian audit market, we compare the pricing and quality effects of market structure between the segment of small and medium-sized (SME) clients and the segment of large clients to test how audit complexity moderates such effects. We find that market concentration impairs price and quality competition in the SME-client segment. Market concentration is unrelated to audit quality in the large-client segment, where we argue that concentration is endogenous to audit complexity. Furthermore, we find that client mobility stimulates price competition in both segments but improves audit quality only in the large-client segment. We interpret our findings as evidence that (a) audit market concentration impairs competition especially when audits have low complexity and that (b) the large-client market segment, characterized by higher audit complexity and higher market concentration, can also be price and quality competitive if clients are sufficiently mobile, and change auditors relatively frequently.