Corruption and audit market concentration: an international investigation

This paper examines the association between the corruption level of a country and audit market concentration. Using a sample from 78 countries over the 2003-2012 period, we document a positive association between corruption and Big 4 audit market concentration, suggesting that in more corrupt countries, the audit market at the industry level is dominated by one or two Big 4 audit firms rather than shared equally. To provide further understanding about how corruption is associated with Big 4 audit market concentration, we conduct a path analysis and find that corruption has an indirect effect on audit market concentration through collusion. These results are consistent with the notion that corrupt governments do not effectively control collusion and thus decrease market competition, leading to a decrease in the perceived severity of information leakage and a lower concern about sharing a common auditor. Finally, we conduct a battery of sensitivity tests. Our results are robust to change analysis, to controlling for other factors that are likely to influence auditor choices and the market structure, to an alternative measure of concentration, and to alternative samples. Overall, we provide evidence to suggest that country-level corruption plays a role in Big 4 audit market concentration.