The effect of large audit firm mergers on audit pricing in the UK

This paper examines the effects of audit firm mergers and the demise of Andersens on market concentration, competitiveness and audit pricing in the UK. Our results indicate that the large audit firms increased their market share between 1985 and 2002 by merging and expanding into new sectors. However, contrary to popular belief, the significant fee discounting of the 1980’s was not sustained in the 1990’s. We also investigate what happened to audit fees after mergers between accounting firms. After the mergers in 1989/90 between Coopers and Lybrand and Deloitte and between Arthur Young and Ernst and Whinney, audit fees tended to increase. In contrast, audit fees fell on average after the 1997 merger between Price Waterhouse and Coopers and Lybrand. The merger between Deloitte and Andersens in 2002 appears not to have materially affected audit fees to date. Our results provide evidence that auditees are likely to pay higher fees if their auditor merges with a larger counterpart. Consistent with the quality differentiation theory, we attribute this result to increased returns to the brand name reputation of the smaller firms.