Review of Quantitative Finance and Accounting

, Volume 52, Issue 2, pp 403–438 | Cite as

Fee competition among Big 4 auditors and audit quality

  • Sharad AsthanaEmail author
  • Inder Khurana
  • K. K. Raman
Original Research


Both the GAO (Public accounting firms: mandated study on consolidation and competition. GAO, Washington, 2003; Audits of public companies: continued concentration in audit market for large public companies does not call for immediate action. GAO, Washington, 2008) and the US Treasury (Advisory committee on the auditing profession: final report, 2008. have implied that the Big 4 dominated US audit market lacks competition. More recently, the PCAOB has expressed a somewhat different concern, i.e., that because audit committees may be primarily interested in negotiating a lower audit fee (rather than championing higher audit quality) for their clients, fee competition in the US audit market could pressure the incumbent auditor to compromise on audit quality (Doty in Keynote address: the reliability, role and relevance of the audit: a turning point, 2011. We utilize the notion of counterfactual fees chargeable by auditors to assess fee competition and investigate competing views on the relation between fee competition among Big 4 auditors and audit quality in US local audit markets. To operationalize fee competition at the client-level in the context of each local audit market, we compute a separate counterfactual audit fee that would be charged by every other Big 4 auditor for that particular engagement and use the minima of the counterfactuals. We validate our audit fee competition metric by showing a positive relation with the incumbent auditor’s switching risk. Collectively, our findings suggest that fee competition is useful as a mechanism for improving audit quality in the highly concentrated US audit market, albeit only in local audit markets where the incumbent auditor has below-median market power and only for higher quality clients. Overall, our findings speak to the interplay between fee competition and auditor incentives and are of potential interest to regulators such as the PCAOB concerned about competition in US audit markets.


Big 4 firms Audit fee competition Audit quality PCAOB 

JEL Classification

M41 M42 



We thank the editor and two reviewers for their helpful comments and suggestions. We also thank Jong-Hag Choi, Clive Lennox, workshop participants at the University of Texas at San Antonio and the Chinese University of Hong Kong, and attendees at the AAA 2016 Annual Meeting (2016) and the Journal of Contemporary Accounting and Economics 2017 Symposium for their feedback and suggestions. K. K. Raman acknowledges support from the Ramsdell Endowed Chair for Accounting at The University of Texas at San Antonio.


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© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.College of BusinessThe University of Texas at San AntonioSan AntonioUSA
  2. 2.School of AccountancyUniversity of MissouriColumbiaUSA

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