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The aim of this paper is to examine the impact of competition in audit market and
client importance to perceived auditor independence from the perspective of Malaysian
auditors, loan officers and senior managers of public listed companies. It is found that
auditor independence would be threatened if auditors were to receive significant fees from a
single client. The dependence on a single client would cause auditor to face a `self-threat'
risk, where they were economically and financially reliant on a single customer. The
interview survey disclosed that regulatory authorities should closely monitor the profession
by persistently scrutinising each audit firm's revenue and expenses.
Over the last few decades, large accounting firms have dominated the worldwide audit
market (Moizer and Turley, 1987; Minyard and Tabor, 1991; Tonge and Wootton, 1991; Beattie
and Fearnley, 1994; Wootton et al., 1994; Walker and Johnson, 1996; Weets and Jegers,
1997; Choi and Zeghal, 1999; Pong, 1999; Beattie et al., 2003; Peecher, 2003; Willekens and Achmadi, 2003; and GAO, 2003a). The United States General Accounting Office
(GAO) described the market for audit services, especially for large companies, as `a tight
oligopoly'. In this respect, the top four firms control more than 60% of the market and other firms
face difficulties in terms of entering the market (GAO, 2003a, p. 16). In the UK, Beattie et al. (2003) found that the Big Four (then Big Five) audit firms held 90% of the UK listed
company audit market in the period prior to the demise of Andersen in 2002 and this figure
increased to 96% after the demise of Andersen. They further documented that a single audit
firm Pricewaterhouse Coopers (PwC), controlled 37% of the market, and noted that, "levels
of concentration are significantly higher in the premier market segments and certain
industry sectors" (p. 262). The consolidation and mergers between the largest accounting firms
in the 1980s, 1990s and 2000s significantly heightened the concentration among the
largest firms, and this has created an immense amount of interest in the association of
concentration and level of competition. In fact, auditors could be involved in collusion and monopoly
due to audit concentration (Yardley et al., 1992, p. 159; and Carlton and Perloff, 1994, p. 331).
The impact of the audit market concentration has been described differently by
McHugh (1996, p. 10), who believed that the scenario would create more competition. On the
other hand, the GAO (2003a) is concerned about the possibility of lack of effective
competition. In this respect, the GAO (2003a) noted, "the significant changes that have occurred in
the profession may have implications for competition and public company choice,
especially in certain industries, in the future" (p. 2). Indeed, competition in the audit market
has increased over recent decades, as shown by fee minimization strategies adopted by
companies as well as the practices of low-balling, opinion shopping, tendering and audit firm
mergers (Beattie and Fearnley, 1998, p. 262). |
