Audit Firm Merger and the Strategic Response by Large Audit Firms

The British Accounting Review, 53(3), https://doi.org/10.1016/j.bar.2020.100941

The University of Auckland Business School Research Paper Series

Posted: 25 Jan 2022

See all articles by Steven F. Cahan

Steven F. Cahan

University of Auckland Business School

David Hay

University of Auckland Business School

Lina Li

University of Auckland Business School

Date Written: 2020

Abstract

We examine the impact of a change in the audit industry structure in China as a result of two recent mergers involving large non-Big 4 audit firms. The ‘New Big’ audit firms, Ruihua and BDO Lixin, became the third and fourth largest audit firms in China following audit firm mergers, outranking both EY and KPMG in terms of total audit revenues in 2013. We find a significant audit fee and audit quality increase for the New Big audit firms relative to the Big 4 audit firms following the mergers. While this finding could be interpreted as an increase in quality as a result of audit firm consolidation, we find that this net effect is due to a decrease in audit fees and audit quality for the Big 4 following the mergers, rather than an increase in audit fees and audit quality by the New Big audit firms. We discuss the implications of our findings for various regulators. Full paper available at https://doi.org/10.1016/j.bar.2020.100941

Keywords: Audit firm merger, Audit pricing, Audit quality, Big 4, Non-big 4, Audit industry structure

Suggested Citation

Cahan, Steven F. and Hay, David and Li, Lina, Audit Firm Merger and the Strategic Response by Large Audit Firms (2020). The British Accounting Review, 53(3), https://doi.org/10.1016/j.bar.2020.100941, The University of Auckland Business School Research Paper Series, Available at SSRN: https://ssrn.com/abstract=3990371

Steven F. Cahan (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

David Hay

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Lina Li

University of Auckland Business School ( email )

Auckland, 1010
New Zealand

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