감사시장 집중도와 감사품질 - 산업별 시장점유 1위 감사인을 중심으로 -

Abstract

Policy makers have expressed concern about the risk posed by the auditor concentration. In this paper, we examine whether concentration in Korean audit market affects the auditor's tolerance for earnings management by audit clients. Auditor concentration could result in a more lenient and less skeptical approach to audits, and accordingly lower audit service quality. Concentration also could have a beneficial effect on audit quality due to reduced fear of being replaced by a more compliant auditor. Some prior studies suggest a positive association between audit quality and concentration while the others, including a recent Korean study, indicate a negative association. Hence, the relation between auditor concentration and audit quality remains an empirical question. The results of previous empirical studies on differential audit quality of Big 4 auditors and industry specialized auditors are mixed in Korea. Accounting scandals have repeated in spite of the internationally recognized Big 4 auditors operating in Korea. Demand for enhancement of audit quality in Korea has also continued. In Korea, each Big 4 auditor has one engagement office; four engagement offices of Big 4 auditors cover the entire country; the biggest market share auditor is outstandingly notable; and auditor concentration by industry is varying. Concentration could have more negative effect to the biggest industry market share auditors on audit quality due to the fear of loosing market share in Korea. To examine the effects of audit market concentration on audit quality in Korea, we focus on the biggest market share auditor by industry. This paper investigates whether the biggest industry market share auditors are associated with audit quality in connection with the degree of concentration by industry. Our sample covers the 1996-2013 time period and consists of 18,407 firm-year observations. We also examine a sample of 9,936 firm-year observations where the clients are audited by Big 4 auditors. Following prior studies, we use accrual-based earnings quality as a proxy for audit quality. Our primary measure is absolute value of performance matched discretionary accruals by Kothari et al. (2005). Our results indicate that higher concentration (as measured by the Herfindahl index) is associated with the likelihood of the client having higher absolute value of performance matched discretionary accruals, only if the auditor is the biggest market share auditor by industry. We are unable to detect a relation between auditor concentration and audit quality in Korean audit market, which is different from the previous study. This implies that auditor concentration itself does not have an effect on audit quality. Instead, audit quality of the biggest market share auditor by industry is lower than quality of the other auditors. As a matter of primary interest, audit quality of the biggest industry market share auditor becomes lower as the auditor concentration by industry becomes higher. Our results hold across alternative measure of Herfindahl index based on sales as well as on total assets. Specifically, audit quality is lower as auditor concentration becomes higher, but only for firms audited by the biggest market share auditors. In the absence of stricter investor protection, the biggest market share auditors simply do not have incentives to enforce high quality earnings and risk dismissal by their client in Korea. Thus our findings refute the view audit quality of the biggest market share auditors is higher as a industry specialist auditors. Our results also hold across the sample clients audited by Big 4 auditors. This paper explains why audit quality of the big size auditors and industry specialized auditors are not higher than audit quality of other auditors in Korea. The biggest market share auditor by industry is unable to provide higher quality audit due to the fear of loosing market share in Korea.