The Effects of Audit Market Concentration and Auditor Reputation on Audit Quality : Evidence from Government Auditors

We investigate how a high degree of audit market concentration and auditor reputation affect audit quality. Using audit adjustments to student loan loss provisions in government audits to construct a new measure for excessive audit conservatism, we show that an audit market monopoly leads to excessively conservative audit adjustments to the provisions and, thus, to lower audit quality. We also examine the effect of a positive shock to auditor reputation on audit quality. We find that before the increase to their reputation, monopolistic auditors require more conservative, yet not excessively conservative, adjustments than auditors in a competitive market. However, after the reputation increase, the adjustments become excessively conservative. This result suggests that the combination of enhanced audit market concentration and high auditor reputation leads to excessive auditor conservatism. Consistent with the excessive nature of the adjustments, we find no significant association between the adjustments and future student loan write-offs. Additional analysis reveals that career concerns play a role in driving the excessive conservatism. Our study has implications for the ongoing debate regarding the impact of reduced competition in the audit market on audit quality and for the government