The Pricing of Audit Services: Theory and Evidence

The question of the existence of competition among auditors has been the subject of considerable discussion in recent years. More specifically, the firms as a group have been accused of monopolizing the market for audits {Staff Study of the Subcommittee on Reports, Accounting and Management of the Senate Committee on Government Operations [1977]). However, evidence on the issue is scanty and typically anecdotal (e.g., Bernstein [1978]). The evidence of the Staff Study itself is limited to statistics, with the allegations relying on what has come to be called the concentration doctrine (Demsetz [1973]). According to this doctrine, supplier is a reliable indicator of supplier behavior and performance. In this paper, I provide evidence from a test of the hypothesis that price competition prevails throughout the market for the audits of publicly held companies, irrespective of the share of a market segment which is serviced by the Big Eight firms. The evidence is based on an examination of a sample cross-section of audit fees.