Melbourne Accounting Research Seminar - David Lont

Professor David Lont from the University of Otago will present a MARS seminar.

Topic: Are Two Sets of Eyes More Costly Than One? Large-Sample Evidence on Joint versus Single Audits in the European Union

Abstract: The Global Financial Crisis, along with the recent failures of Carillion, BHS, and Patisserie Valerie have led the Competition and Markets Authority (CMA) in the United Kingdom to call for the largest UK accounting firms to split their audit business and to conduct mandatory joint audits of the FTSE 350. By requiring that these firms engage a second audit firm, the CMA expects mandatory joint audits to enhance audit competition, reduce market concentration, and improve audit quality in the United Kingdom. Scant empirical data on the cost of joint audits, however, guides this policy proposal. In this paper, we provide evidence on the cost of joint audits in the European Union. Specifically, we compare the audit markets of the United Kingdom, France, Germany, and several other European countries to understand if single and joint audits are of similar cost, as suggested by the CMA. As the only EU country thus far to have mandatory joint audits, we also examine the record of France in particular. While France has five dominant auditors (Big 5), the market shares of the other audit firms in France compare well with those of the UK, Germany, and other European countries, thus, strengthening our research design. We find that the average fees paid by French firms that have a joint audit exceed the fees paid by UK firms by about 15 percent. We also find that French firms with mandatory joint audits pay higher fees, which are 23.5 percent higher when a French firm engages two Big 5 auditors compared to one Big 5, one non-Big 5 and 26 percent higher than a French firm that engages two non-Big 5 auditors. While the CMA proposal to ban large audit firm combinations to perform joint audits differs from what occurs in France, our results strongly suggest that UK audit fees will increase significantly under the UK proposal.