Audit Regulations, Audit Market Structure, and Financial Reporting Quality

Abstract

In order to reduce the high level of concentration in the market segment of statutory audits of listed companies and to improve audit quality, new audit market regulations have been introduced (e.g., the mandatory rotation of the audit firm in the EU and the prohibition of single-provider auditing and consulting in the EU and in the U.S.). Other measures are currently discussed (e.g., joint audits or shared audits in the UK). However, the empirical evidence as to whether such regulations have the expected effects and whether there is actually a negative correlation between concentration and audit quality is mixed. This could be because the effects of regulatory measures on auditor and auditee incentives and their effects on market structure are interdependent, and, moreover, simultaneously determine audit quality. We therefore do not only provide a structured overview of the empirical literature on the effects of audit market regulations, but also discuss how to analyze these effects based on analytical models.