The US auditing industry has been characterized as an oligopoly, which has successively tightened from eight key players to four over the last 25 years. This tightening is likely to change the incentives of the surviving big auditors, with implications for their role in our market economy. The latest research proves and shows how accounting can evolve according to these concepts:
#1: Influence of audit oligopoly
This research investigates the impact of the tightening audit oligopoly on "Big Four" auditors' propensity to discuss decreased "reliability" in accounting standards proposed by the Financial Accounting Standards Board (FASB).
#2: Reliability & “verifiability”
"Reliability" is a key attribute of accounting. Moreover, reliability is directly relevant to auditors because it entails "verifiability," another key aspect of auditing. Most clients consider it to be #1 factor when choosing a company for their needs of accounting, taxation management, and other business related purposes.
#3: Certain risks emerge when auditing oligopoly tightens
As the auditing oligopoly has tightened, big auditors are more prone to eschew the judgment and risks inherent in less reliable accounting standards.
#4: Rules of accounting have evolved
provide some descriptive evidence on the evolution of "rules" over "principles" in U.S. Generally Accepted Accounting Principles (GAAP).
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#5: When oligopoly tightens, reliability decreases
Due to this research, as the oligopoly has tightened, our auditors are more likely to express concerns about decreased "reliability" in FASB-proposed accounting standards (relative to an independent benchmark); this finding is robust to controls for various alternative explanations.
The results are consistent with the auditors facing greater political and litigation costs attributable to their increased visibility from tightening oligopoly and with decreased competitive pressure among the accounting and audit companies to satisfy client preferences (who usually demand accounting flexibility at the expense of reliability). The results are inconsistent with the claim that the companies increasingly consider themselves "too big to fail" as the audit oligopoly tightens.
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