Effects of the PricewaterhouseCoopers merger on the UK audit services market

Effects of the PricewaterhouseCoopers merger on the UK audit services market Purpose – This paper seeks to investigate the effect of the PricewaterhouseCoopers (PwC) merger on the market for audit services in the UK. To this end a “what if” analysis is conducted comparing estimated outcomes prior to the merger with those expected under post‐merger conditions. Particular attention is given to the effect of the merger on the relative performance of the top tier and non‐top tier audit firms. Design/methodology/approach – The paper employs a Markov chain model to estimate the long‐term market shares of audit firms' pre‐merger and post‐merger. Concurrently, an optimisation model is employed to generate parameters reflecting the relative attractiveness of audit firms and the probability that a client company continues with the current audit firm. Findings – Prior to the PwC merger, this model would predict a large reduction in the share of the non‐Big Six from 17 per cent to a long run 7 per cent. However, the effect of the PwC merger appears to be that the position of the non‐Big Five has been improved and the model predicts a slight increase in long‐term market share to 18 per cent. Research limitations/implications – The Markov model employed makes a number of assumptions that may restrict the generality of the implications that can be drawn from the analysis. Practical implications – The results show that, contrary to the worries of the competition authorities, the long‐term impact of the PwC merger, ceteris paribus , would be to improve the position of the non‐top tier of auditing firms. Originality/value – Auditor concentrations studies have been mostly descriptive. This paper reports an analytical study of the potential effect of audit mergers on market concentration. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Auditing Journal Emerald Publishing

Effects of the PricewaterhouseCoopers merger on the UK audit services market

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Publisher
Emerald Publishing
Copyright
Copyright © 2007 Emerald Group Publishing Limited. All rights reserved.
ISSN
0268-6902
DOI
10.1108/02686900710718645
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper seeks to investigate the effect of the PricewaterhouseCoopers (PwC) merger on the market for audit services in the UK. To this end a “what if” analysis is conducted comparing estimated outcomes prior to the merger with those expected under post‐merger conditions. Particular attention is given to the effect of the merger on the relative performance of the top tier and non‐top tier audit firms. Design/methodology/approach – The paper employs a Markov chain model to estimate the long‐term market shares of audit firms' pre‐merger and post‐merger. Concurrently, an optimisation model is employed to generate parameters reflecting the relative attractiveness of audit firms and the probability that a client company continues with the current audit firm. Findings – Prior to the PwC merger, this model would predict a large reduction in the share of the non‐Big Six from 17 per cent to a long run 7 per cent. However, the effect of the PwC merger appears to be that the position of the non‐Big Five has been improved and the model predicts a slight increase in long‐term market share to 18 per cent. Research limitations/implications – The Markov model employed makes a number of assumptions that may restrict the generality of the implications that can be drawn from the analysis. Practical implications – The results show that, contrary to the worries of the competition authorities, the long‐term impact of the PwC merger, ceteris paribus , would be to improve the position of the non‐top tier of auditing firms. Originality/value – Auditor concentrations studies have been mostly descriptive. This paper reports an analytical study of the potential effect of audit mergers on market concentration.

Journal

Managerial Auditing JournalEmerald Publishing

Published: Jan 9, 2007

Keywords: Markov processes; Auditing standards; Competitors; United Kingdom

References

  • And then there were four: a study of UK audit market concentration – causes, consequences and the scope for market adjustment
    Beattie, V.; Goodacre, A.; Fearnley, S.
  • Current accounting investigations: effect on Big 5 market shares
    Comunale, C.L.; Sexton, T.R.
  • The effect of the PricewaterhouseCoopers merger on auditor concentration in Australia: a note
    Thavapalan, S.; Moroney, R.; Simnett, R.

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