UBC Theses and Dissertations

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UBC Theses and Dissertations

Market structure, auditor independence and auditor turnover Nielsen, Abigail


This thesis examines some of the relationships between the market structure of public auditing, auditor independence, and the rate of auditor changes over time. The first section of this thesis examines the relationship between market structure and auditor independence with a summary and extension of a recent paper written in collaboration with two other researchers. We concluded that competitive pricing will lead to auditor independence, whereas the existence of economic rents resulting from non-competitive pricing allows for the possibility of non-independence. We also concluded that if a non-competitive market for audits changes to a more competitive state, then a period of disequilibrium occurs where independence may be compromised until the competitive equilibrium is achieved. The second section of this thesis examines the effects of such a disequilibrium period on auditor independence, auditor fees, and in particular, the rate of auditor turnover. During the disequilibrium, price rivalry should drive auditor fees down to the competitive equilibrium. Incumbent auditors will either reduce fees to match the lower bids of their competitors, or client companies will change to non-incumbent auditors offering identical- audit services at a lower price. A third possibility is that independence may be compromised if incumbents maintain higher fee structures in exchange for non-independent actions. However, as not all auditors will be willing to risk non-independent action, an empirical implication would be that price rivalry not only lowers fees but, ceteris paribus, also increases auditor turnover. The empirical portion of this thesis examines the effect of increased rivalry on auditor turnover. After a review of the existing literature on auditor changes, an empirical study of auditor changes between 1969 and 1983 was performed for a random sample of OTC firms. Assuming that the recent removal of AICPA prohibitions on competitive bidding, advertising and direct solicitation have acted as invitations for increased price rivalry, then we would expect to observe an increase in auditor turnover during the period examined. Annual turnover rates were computed, and a series of regression tests were performed using the Michigan Data Analysis System (MIDAS). The results of these tests failed to reject the hypothesis of no change in auditor turnover over the fifteen year period examined. Further market segmentation for changes within Big Eight auditors and for changes within non-Big Eight auditors did not alter the basic result of relatively constant auditor changes over time. Only the changes from non-Big Eight to Big Eight auditors indicated any statistically significant relationship to time. A number of potential explanations as to why this study did not produce the expected results of increased auditor turnover are examined, and areas for future research are discussed.

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