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.
Managerial Auditing Journal – Emerald Publishing
Published: Jan 9, 2007
Keywords: Markov processes; Auditing standards; Competitors; United Kingdom
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