Office-Client Balance and Metro Area Audit Market Competition

What is it about?

We propose a new audit supplier competition construct: the Office-Client Balance (OCB), which consists of the relative abundance of suppliers (competing audit offices) and customers (audit clients) in a metropolitan (metro) area. From this construct, we derive a metro-level audit competition proxy reflecting surpluses or shortfalls of total metro audit office numbers relative to the national metro OCB norm: the OCB_TOT. Consistent with the predictions of Porter's Five Forces theory, we find that OCB_TOT is associated with lower fees, more auditor turnover, and more (less) office exits (entrances) in metro audit markets. We find OCB_TOT is associated with higher audit quality, proxied by fewer instances of financial misstatements. In summary, our study contributes to the modestly sized literature on audit market structure by developing a new variable that is incrementally useful in capturing audit market competitive structure at the metro level beyond existing measures.

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