The effect of large audit firm mergers on audit pricing in the UK

Abstract

This paper examines the effects on UK audit market concentration and pricing of mergers between the large audit firms and the demise of Andersen. Based on data over the period 1985–2002, it appears that mergers contributed to a rise in concentration ratios to levels that suggest concern about the potential for monopoly pricing. The high concentration ratios have not improved the level of price competition in the UK audit market. Our pooled models suggest that concentration ratios are associated with higher audit fees. The evidence suggests that the effects of mergers between big firms on brand name fee premium and on price competition vary depending on the particular circumstances. The brand name premium is strongest for the largest quartile of companies prior to the mergers. After the Big Six mergers, the premium increases for average‐sized companies but falls for the smallest and largest companies. Following the PricewaterhouseCoopers merger, the premium increases for below median‐sized clients but decreases for above‐median sized clients. For the Deloitte‐Andersen transaction, the premium falls for the smallest and largest companies but increases for those in the second quartile. Our results provide evidence that auditees are likely to pay higher fees if their auditor merges with a larger counterpart. We attribute merger‐related fee hikes to product differentiation, rather than anti‐competitive pricing.

Key words:

• concentration
• mergers
• pricing
• oligopoly
• choice

Notes

McMeeking is at Exeter University. Peasnell and Pope are at Lancaster University. This research benefited from the generous financial support from the International Centre for Research in Accounting. Previous copies of the paper we represented at the 2005 British Accounting Association Auditing SIG conference and the 2005 EARNet conference. We are very grateful to Ashni Singh and Richard Patterson for research assistance and for the helpful comments of Peter Moizer, Ilias Basioudis, Vivien Beattie, David Citron, Terry Cooke, Paul Dunnmore, Aasmund Eilifsen, Jere Francis, David Gwilliam, Pelham Gore, Jonathan Hayward, Clive Lennox, Mark Tippett, Stuart Turley, Steven Young, the editor (Pauline Weetman) and two anonymous reviewers. Any remaining errors are the sole responsibility of the authors. Address for correspondence: Kevin McMeeking, School of Business & Economics, Streatham Court, Exeter University, Exeter, EX4 4PU, email: [email protected], Tel: (0044) [phone] (direct line), (0044) [phone] (secretary),Fax: (0044) [phone]