Audit Firm Concentration and Competition: Effects of Consolidation Since 1997

Transcription

1 Audit Firm Concentration and Competition: Effects of Consolidation Since 1997 by Susan E. Cammack Assistant Professor, Washburn University and Maria Caban-Garcia Assistant Professor, University of South Florida-Sarasota/Manatee Draft Date: November 11, 2005 Address correspondence regarding this paper to: Susan E. Cammack, Washburn University, School of Business, 1700 S.W. College Avenue, Topeka, KS 66621; The authors would like to thank April Brack and Olga Medina-Loaiciga for assisting with the research for this paper.

2 ABSTRACT For many years, businesses, government regulators, and the public, in general, have expressed concern about the dominance of a few large public accounting firms in the audit market. Recent events, such as the merger of Price Waterhouse and Coopers & Lybrand in July of 1998, changes in regulations for public companies and auditors, and the dissolution of Arthur Andersen in August of 2002, have increased the level of concern about the lack of competition in the public accounting industry. We examine the level of competition, measured by concentration, before and after the merger and before and after the dissolution of Arthur Andersen among the eight most active audit firms in We also segment the audit market by exchange, by size, by industry, and by geographic region of the client firms. We find that concentration did indeed increase after the merger and after the dissolution of Arthur Andersen but, in many instances, decreased in the years between those two events. We also find evidence that, while some segments of the audit market are highly concentrated, there are many segments that are not highly concentrated and, therefore, are relatively competitive among the remaining six firms active in the market for audits of public companies. 2

3 INTRODUCTION For many years, businesses, government regulators, and the public, in general, have expressed concern about the dominance of a few large public accounting firms in the audit market. For example, in 1976, a U. S. Senate Sub-Committee released a report, The Accounting Establishment, on the public accounting industry. The report concluded that the Big Eight public accounting firms dominated the market for auditing large companies and companies in certain major industries. In 1989, the Big Eight audit firms became the Big Six with the merger of Ernst & Whinney and Arthur Young & Co. and the merger of Deloitte Haskins & Sells and Touche Ross & Co. Recent events have increased the level of concern about the lack of competition in the public accounting industry. Price Waterhouse merged with Coopers & Lybrand in July of There have been numerous changes in laws and regulations for public companies and auditors, such as passage of the Sarbannes-Oxley Act. On August , the firm of Arthur Andersen was dissolved after being convicted on charges related to the Enron accounting scandal. That left only four Big public accounting firms, Ernst & Young, Deloitte & Touche, KPMG Peat Marwick, and PriceWaterhouseCoopers. Concerns include monopolistic pricing, a decline in the quality of audits and of the services provided by audit firms, a decrease in the stability of capital markets and in investor confidence, and the impact of another large public accounting firm failure. Edward E. Nusbaum, CEO of Grant Thornton LLP, in a January 25, 2005 Wall Street Journal article, expresses the belief that the audit industry needs to be more competitive. He claims that everyone agrees that auditor concentration is dangerous for companies and stakeholders and urges directors and audit committees to consider selecting audit firms outside 3

4 of the Big Four (such as his firm, Grant Thornton). He cites a 2003 GAO survey that found that 99% of sales revenues of the Fortune 1000 public companies were audited by one of the Big Four firms. He offers alternatives to proposed regulatory solutions such as mandatory rotation of auditors or breaking up the remaining Big Four audit firms. Another concern Nusbaum mentions is the difficulty that entities in smaller, perhaps less profitable, niche markets may have in engaging qualified auditors. Audrey Williams June writes in the August 12, 2005 issue of The Chronicle of Higher Education that colleges and universities are experiencing difficulty in retaining one of the Big Four audit firms and, when they can, they are being charged more for the services provided. Prior research has indicated that concentration in the audit industry increased after the 1989 mergers and the 1998 merger. The concentration was particularly high in the audits of clients listed on the New York Stock Exchange and in certain industries. We examine the level of competition, measured by concentration ratios and Herfindahl indices, before and after the merger of Price Waterhouse and Coopers & Lybrand and before and after the dissolution of Arthur Andersen among the eight most active audit firms in We include publicly held U.S. firms as well as foreign firms from the Global Vantage database. By including international firms from the Global Vantage database, the resulting sample is much larger than that used in prior studies. Consistent with prior studies, we use market shares based on the number of client firms and based on the square root of client revenues, a proxy for audit fees. We also segment the audit market by exchange, by size, by industry, and by geographic region of the client firms. Previous studies have examined the concentration by exchange and by industry. We know of no 4

5 other study that has segmented the audit industry by the size of the client or by the geographic region of the client firms. We find that concentration did indeed increase after the merger and after the dissolution of Arthur Andersen but, in many instances, decreased in the years between those two events. We also find evidence that, while some segments of the audit market are highly concentrated, there are many segments that are not highly concentrated and, therefore, are relatively competitive among the remaining six active firms. There is also evidence that public companies as a whole seem reluctant to select an auditor that is not among the largest audit firms (now, Big Four). The remainder of the paper is organized as follows. The next section summarizes prior research on concentration in the audit industry, industry specialization by audit firms, and local markets as a unit of analysis of the audit market. The following section describes the methodology for the sample selection and sample segmentation and calculation of the concentration measures used in this study. The third section discusses preliminary results and the last section is concluding remarks. PRIOR RESEARCH [still to be completed] [Concentration] Minyard and Tabor 1 discuss the impact of the mergers in 1989 on concentration in the auditing industry. Two possible reasons for audit firms to merge are the expansion of the audit market to outside the U.S. and the increasing industry specialization of audit firms. Mergers provide opportunities for returns to scale for the merged firm and specialization in more industries. Minyard and Tabor argue that the Herfindahl Index (HI) is a better measure of concentration than concentration ratios (CR). Concentration ratios are not suited for an oligopolistic competition but the Herfindahl index is sensitive to both the number of 1 Donald H. Minyard and Richard H. Tabor, The Effect of Big Eight Mergers on Auditor Concentration, Accounting Horizons (December 1991), pp

6 firms active in a particular segment and to the dispersion of activity (market share) among those firms. They give the example of two markets, each one with a 4-firm concentration ratio (CR 4 ) of This means that the sum of the market shares of the top four firms equals 80%. However, if one of those markets is composed of four firms with market shares of 20% each and four firms with market shares of 5% each, the Herfindahl index would equal If the other market is composed of one firm with a 65% share and the other seven firms have market shares of 5% each, the HI would equal 0.44, indicating that this market is much more concentrated. 2 [Exchanges] [Industry specialization] Minyard and Tabor calculated the Herfindahl indices for 1,618 companies in 40 industries (2-digit SIC codes with at least 10 companies) audited by a Big Eight auditor. They also calculated what they called an HI adjustment, which was just the difference between the HI and what the HI would be in a perfectly competitive market (see footnote 2). They concluded that if concentration is measured by industry with the Herfindahl Index, the proposed mergers that occurred in 1989 had little impact on the level of competition in the audit industry. [Local markets] METHODOLOGY We gathered data from all available publicly held companies in the Compustat Research Insight and Global Vantage databases for the years 1997 and 1999 (the years before and after the merger of Price Waterhouse and Coopers & Lybrand) and the years 2001 and 2003 (the years before and after the dissolution of Arthur Andersen). The data items needed were company 2 If there are eight active firms in a market, in a perfectly competitive market, i.e., one in which each firm has exactly the same market share, the Herfindahl Index would equal 1/8 or

7 name, primary SIC code, location, auditor, exchange (U.S. firms), sales, total assets, number of shares outstanding (U.S. firms) or market value (foreign firms). Originally there were 23,012 companies in 1997, 24,395 companies in 1999, 23,017 companies in 2001, and 20,105 companies in Note that the percentage of companies in the databases that list the auditor as Other has increased from 32.42% in 1997 to 37.57% in This category includes companies with auditors not among the twenty-four public accounting firms that have been assigned a specific code in the Compustat databases, companies that have experienced a name change or have merged with other companies, and companies that did not file financial statements for some reason. If a significant number of companies switched to audit firms that are not currently assigned a code in recent years, Compustat may need to add auditor codes to their databases in the future. This is an issue that we may investigate further in the future. We decided to include only the eight most active audit firms in 1997 for this study. Those firms were the Big Six firms (Arthur Andersen, Coopers & Lybrand, Ernst & Young, Deloitte & Touche, KPMG Peat Marwick, and Price Waterhouse) and two others, BDO Seidman and Grant Thornton. Even though prior research has only examined the Big firms, BDO Seidman and Grant Thornton were included for several reasons. Those two firms were the only two second-tier accounting firms that audited more than 100 total firms in any of the four years (1997, 1999, 2001, and 2003). The concentration ratios, in particular, would not be as meaningful, especially in 2003 when there were only four large firms remaining. It also seemed logical that if any of the audit firms in the second tier were going to gain market share during this time period, it would be the two with the largest market shares in The final sample is composed of 15,310 firms in 1997 (8,380 U.S. and 6,930 international), 15,760 firms in

8 (7,979 U.S. and 7,781 international), 14,369 firms in 2001 (6,974 U.S. and 7,395 international), and 12,343 firms in 2003 (6,118 U.S. and 6,225 international). Concentration ratios were calculated by adding the market shares of the top four firms, CR 4, and the top six firms, CR 6. Herfindahl indices (HI) were calculated by adding the squares of the market shares of all active audit firms. All measures were calculated using market shares based on the number of clients and market shares based on the square root of client revenues. The square root of client revenues is a commonly used proxy for audit fees and was used in the prior studies. The Herfindahl Index Base was calculated by dividing one by the number of active audit firms. The difference between Herfindahl Index and Herfindahl Index Base was calculated (Minyard and Tabor call this difference an adjustment). The difference represents the relative distance from a perfectly competitive market in which all active audit firms have exactly the same market shares. The assumption is that a market or market segment is competitive if the market shares of all participants are roughly equal. In such a market, power is not concentrated in one firm or small group of firms. The measures described in the previous paragraph were calculated for the entire sample, by exchange (for U.S. firms), and by industry (2-digit SIC codes). We plan to also segment the entire U.S. market by the ten regional divisions, as defined by the U.S. Census Bureau, and calculate measures by these regions. We also plan to add calculations of the measures using market shares based on market values of the client firms. Some of the prior studies included market value, primarily as a measure of size of the client. We may additionally segment the sample by size of the client firms, for example, using deciles of total assets of the client firms. By examining different markets we hope to provide evidence that there is a higher level of 8

9 competition when the market for audits is segmented than when the audit market as a whole is examined. RESULTS The market shares of the eight most active audit firms in 1997, based on the total number of client firms and the square root of client revenues (all firms), appear in Table 1. The total number of client firms and the sum of the square root of client revenues (proxy for audit fees) in each of the four years examined (1997, 1999, 2001, and 2003) also are given. The differences in market shares based on the number of clients and on the square root of client revenues are most pronounced for BDO Seidman and Grant Thornton. This provides the first evidence that the market for auditing the largest client firms is concentrated among the largest audit firms. The merged firm of PriceWaterhouseCooper retained most of the market shares of the two individual firms prior to the merger. Coopers & Lybrand had market shares of 13.29%/15.20% and Price Waterhouse had market shares of 13.91%/15.68% in 1997, the year before the two firms merged. These were the two smallest market shares of the Big Six audit firms in These 1997 market shares added together are 27.20%/30.88%. The market shares of the combined firm, PriceWaterhouseCoopers, in 1999 were 26.12%/30.42%. It appears that the negative publicity Arthur Andersen received during the Enron scandal had already affected the firm s market share by Andersen s market share declined from 17.17%/16.63% in 1999 to 14.95%/15.42% in 2001, the year before its dissolution. The market share of the merged firm, PriceWaterhouseCoopers, declined from 26.12%/30.41% in 1999, the year after the merger to 24.65%/28.60% in Ernst & Young and Deloitte & Touche were the primary beneficiaries of these declines. The market share of Ernst & Young increased 2.03%/1.25% and the market share of Deloitte & Touche increased 1.39%/1.73% between

10 and In 2003, the year after the dissolution of Andersen, those same two firms, Ernst & Young and Deloitte & Touche had gained the most in overall market share. Ernst & Young s market share increased from 21.60%/19.21% in 2001 to 27.48%/24.01% in 2003 and Deloitte & Touche s market share increased from 15.58%/15.98% in 2001 to 20.60%/22.02% in The other two remaining large audit firms increased their market shares by approximately 2% during this same period of time. BDO Seidman and Grant Thornton do not appear to have benefited from either the merger in 1998 or the dissolution in 2002 when the market is viewed as a whole. Their market shares increased very little between 1997 and The 4-firm (CR 4 ) and 6-firm (CR 6 ) concentration ratios for the entire sample appear for all four year in Table 2. The Herfindahl Indices, Herfindahl Bases, and the differences between the two for all four years appear in Table 3. The concentration ratios for the top four audit firms (CR 4 ) increased from (0.6887, measured by square root of client revenues) in 1997 to (0.9788, measured by square root of client revenues) in A pattern emerges here that is seen throughout our study. The 4-firm concentration ratios (CR 4 ) increased in 1999 (from / to /0.8374) after the merger of Coopers & Lybrand and Price Waterhouse in In 2001 the concentration ratios decreased somewhat to / However, in 2003, after the demise of Andersen, the concentration ratios (CR 4 ) increased again to / The Herfindahl Indices display a similar pattern. The differences between the Herfindahl Index (HI) and the Herfindahl Base (the index for a perfectly competitive market) increased from / in 1997 to / in The differences decrease to / in 2001 and then increase again to / in 2003, the year after the dissolution of Arthur Andersen. 10

11 [Discussion of the results by exchange] The 4-firm (CR 4 ) and 6-firm (CR 6 ) concentration ratios for the sample of U.S. firms, segregated by the exchange where they are listed appear for all four year in Table 4 and the Herfindahl Indices, Herfindahl Bases, and the differences between the two for all four years appear in Table 5. The concentration measures are highest for the New York Stock Exchange (NYSE), which is consistent with prior research. Most extremely large client firms are listed on the NYSE so probably only the largest audit firms have the resources necessary to provide audit services to these clients. The Other stock exchange, which consists of leveraged buyouts, subsidiaries, and other types of listings, is also highly concentrated. The NASDAQ, which didn t exist when most of the prior research was done, is also concentrated although not quite as much as the other two. However, the American Stock Exchange (AMEX) and the Over the Counter exchange (OTC) are less concentrated. Perhaps these firms tend to be smaller and, in the case of the OTC firms, more locally oriented. [Discussion of the results by industry] The Herfindahl Indices, Herfindahl Bases, and the differences between the two for all U.S. and international firms [see note at the end of the table], segregated by primary two-digit SIC code, for all four years appear in Table 6. Descriptions of the two-digit SIC codes appear in Table 7. [Discussion of the results by geographical region] CONCLUDING REMARKS [still to be completed] For decades, many have expressed concern about the large public accounting firms dominating the market for auditing publicly held companies. Between 1997 and 2003, two events resulted in the Big Six becoming the Big Four audit firms. While this study does not directly address the concerns about the small number of firms that audit the vast majority of publicly held companies throughout the world, we provide evidence that, especially in some 11

12 markets, there is a relatively low concentration of the most active public accounting firms. This is an indication that there is competitiveness among these active firms. Limitations include only including publicly held firms and not taking into consideration other changes that occurred in the client firm base (for example, mergers), the audit industry (for example, divestiture of the consulting services by the public accounting firms), and the exchanges. 12

13 TABLE 1 Audit Firm Market Shares All U. S. and International Clients of 8 Most Active Audit Firms Audit Firm Number of Clients Square Root Number Square Root Number Square Root Number Square Root Client of Client of Client of Client Clients Clients Clients AA 16.41% 16.10% 17.17% 16.63% 14.95% 15.42% % CL 13.29% 15.20% NA NA NA NA NA NA EY 19.57% 17.96% 20.19% 17.46% 21.60% 19.21% 27.48% 24.01% DT 14.19% 14.25% 14.40% 14.65% 15.58% 15.98% 20.60% 22.02% KP 18.67% 19.14% 18.54% 19.23% 18.61% 18.64% 20.40% 20.95% PW 13.91% 15.68% 26.12% 30.42% 24.65% 28.60% 26.24% 30.90% BD 2.03% 0.84% 2.04% 0.87% 2.08% 1.15% 2.30% 0.96% GT 1.95% 0.84% 1.54% 0.73% 2.54% 1.00% 2.95% 1.14% TOTAL 15,310 $317,723,240 15,760 $336,288,405 14,369 $329,832,153 12,343 $326,235,541 Audit Firms: AA Arthur Andersen CL Coopers & Lybrand EY Ernst & Young DT Deloitte & Touche KP KPMG Peat Marwick PW Price Waterhouse (PriceWaterhouseCoopers after 1998) BD BDO Seidman GT Grant Thornton 13

14 TABLE 2 Audit Firm Concentration Ratios All U. S. and International Firms Before merger (1997) After merger (1999) Before dissolution (2001) After dissolution (2003) Number of Clients CR 4 Number of Clients CR 6 Square Root Client CR 4 Square Root Client CR TABLE 3 Audit Firm Herfindahl Indices All U. S. and International Firms Number of Clients Square Root Client Before merger (1997) Herfindahl Index Base (8 firms) Difference After merger (1999) Herfindahl Index Base (7 firms) Difference Before dissolution (2001) Herfindahl Index Base (7 firms) Difference After dissolution (2003) Herfindahl Index Base (6 firms) Difference

15 TABLE 4 Audit Firm Concentration Ratios All U. S. Firms by Exchange Number of Clients CR 4 Number of Clients CR 6 Square Root Client CR 4 Square Root Client CR 6 NEW YORK STOCK EXCHANGE: Before merger 1997) After merger (1999) Before dissolution (2001) After dissolution (2003) AMERICAN STOCK EXCHANGE: Before merger (1997) After merger (1999) Before dissolution (2001) After dissolution (2003) NASDAQ: Before merger (1997) After merger (1999) Before dissolution (2001) After dissolution (2003) OVER THE COUNTER (OTC): Before merger (1997) After merger (1999) Before dissolution (2001) After dissolution (2003) OTHER 3 : Before merger (1997) After merger (1999) Before dissolution (2001) After dissolution (2003) The Other exchange includes leveraged buyouts (LBO) and subsidiaries. 15

16 TABLE 5 Audit Firm Herfindahl Indices All U. S. Firms by Exchange Number of Clients Square Root Client NEW YORK STOCK EXCHANGE: Before merger (1997) Herfindahl Index Base (8 firms) Difference After merger (1999) Herfindahl Index Base (7 firms) Difference Before dissolution (2001) Herfindahl Index Base (7 firms) Difference After dissolution (2003) Herfindahl Index Base (6 firms) Difference AMERICAN STOCK EXCHANGE: Before merger (1997) Herfindahl Index Base (8 firms) Difference After merger (1999) Herfindahl Index Base (7 firms) Difference Before dissolution (2001) Herfindahl Index Base (7 firms) Difference After dissolution (2003) Herfindahl Index Base (6 firms) Difference NASDAQ: Before merger (1997) Herfindahl Index Base (8 firms) Difference After merger (1999) Herfindahl Index Base (7 firms) Difference Before dissolution (2001) Herfindahl Index Base (7 firms) Difference After dissolution (2003) Herfindahl Index Base (6 firms) Difference

17 Number of Clients Square Root Client OVER THE COUNTER (OTC): Before merger (1997) Herfindahl Index Base (8 firms) Difference After merger (1999) Herfindahl Index Base (7 firms) Difference Before dissolution (2001) Herfindahl Index Base (7 firms) Difference After dissolution (2003) Herfindahl Index Base (6 firms) Difference OTHER 4 : Before merger (1997) Herfindahl Index Base (8 firms) Difference After merger (1999) Herfindahl Index Base (7 firms) Difference Before dissolution (2001) Herfindahl Index Base (7 firms) Difference After dissolution (2003) Herfindahl Index Base (6 firms) Difference The Other exchange includes leveraged buyouts (LBO) and subsidiaries. 17

18 TABLE 6 Audit Firm Herfindahl Indices All U. S. and International Firms by Industry [see note at end of table] (2-digit SIC codes) Industry 5 Concentration Number of Clients Square Number Square Number Square Number Root of of Root of of Root of of Client Clients Client Clients Client Clients 01 HI HB Diff HI HB Diff HI Diff HI HB Diff HI HB Diff HI HB Diff HI HB Diff HI Diff HI HB Diff HI HB Diff HI Diff HI HB Diff HI HB Diff HI HB Diff HI Diff HI Herfindahl Index HB Herfindahl Base: active firms active firms active firms active firms active firms Diff HI HB Square Root of Client 5 Two-digit SIC Codes. Descriptions of the 2-digit SIC codes appear in Table 7. 18

19 Industry Concentration Number of Clients Square Number Square Number Square Number Root of of Root of of Root of of Client Clients Client Clients Client Clients 28 HI Diff HI HB Diff HI Diff HI HB Diff HI HB Diff HI HB Diff HI Diff HI Diff HI Diff HI Diff HI Diff HI Diff HI HB Diff HI HB Diff HI HB Diff HI HB Diff HI Herfindahl Index HB Herfindahl Base: active firms active firms active firms active firms active firms Diff HI HB Square Root of Client 19

20 Industry Concentration Number of Clients Square Number Square Number Square Number Root of of Root of of Root of of Client Clients Client Clients Client Clients 47 HI HB Diff HI Diff HI Diff HI Diff HI Diff HI HB Diff HI HB Diff HI HB Diff HI Diff HI HB Diff HI HB Diff HI Diff HI Diff HI HB Diff HI Diff HI HB Diff HI Herfindahl Index HB Herfindahl Base: active firms active firms active firms active firms active firms Diff HI HB Square Root of Client 20

21 Industry Concentration Number of Clients Square Number Square Number Square Number Root of of Root of of Root of of Client Clients Client Clients Client Clients 63 HI HB Diff HI HB Diff HI Diff HI HB Diff HI HB Diff HI HB Diff HI Diff HI HB Diff HI HB Diff HI HB Diff HI HB Diff HI HB Diff HI HB Diff HI Diff HI HB Diff HI Herfindahl Index HB Herfindahl Base: active firms active firms active firms active firms active firms Diff HI HB Square Root of Client [Note: Only 1997 includes international firms from the Global Vantage database. International firms from the other years will be added as well as market shares based upon the square root of revenues. ] 21

22 TABLE 7 INDUSTRY DESCRIPTIONS (2-digit SIC Codes) SIC Code Description 6 (2-digit) 01 Agricultural Production Crops 02 Agricultural Production Livestock and Animal Specialties 07 Agricultural Services 08 Forestry 09 Fishing, Hunting, and Trapping 10 Metal Mining 12 Coal Mining 13 Oil and Gas Extraction 14 Mining and Quarrying Of Nonmetallic Minerals, Except Fuels 15 Building Construction General Contractors and Operative Builders 16 Heavy Construction Other Than Building Construction Contractors 17 Construction Special Trade Contractors 20 Food and Kindred Products 21 Tobacco Products 22 Textile Mill Products 23 Apparel and Other Finished Products Made From Fabrics and Similar Materials 24 Lumber and Wood Products, Except Furniture 25 Furniture and Fixtures 26 Paper and Allied Products 27 Printing, Publishing, and Allied Industries 28 Chemicals and Allied Products 29 Petroleum Refining and Related Industries 30 Rubber and Miscellaneous Plastics Products 31 Leather and Leather Products 32 Stone, Clay, Glass, and Concrete Products 33 Primary Metal Industries 34 Fabricated Metal Products, Except Machinery and Transportation Equipment 35 Industrial and Commercial Machinery and Computer Equipment 36 Electronic and Other Electrical Equipment and Components, Except Computer Equipment 37 Transportation Equipment 38 Measuring, Analyzing, and Controlling Instruments; Photographic, Medical and Optical Goods; Watches and Clocks 39 Miscellaneous Manufacturing Industries 40 Railroad Transportation 41 Local and Suburban Transit and Interurban Highway Passenger Transportation 42 Motor Freight Transportation and Warehousing 43 United States Postal Service 44 Water Transportation 45 Transportation by Air 46 Pipelines, Except Natural Gas 47 Transportation Services 48 Communications 50 Wholesale Trade durable Goods 51 Wholesale Trade non-durable Goods 52 Building Materials, Hardware, Garden Supply, and Mobile Home Dealers 6 The descriptions of the Major Groups (2-digit SIC Codes) are from the website of the Occupational Safety & Health Administration (U.S. Department of Labor). 22

23 SIC Code Description 6 (2-digit) 53 General Merchandise Stores 54 Food Stores 55 Automotive Dealers and Gasoline Service Stations 56 Apparel and Accessory Stores 57 Home Furniture, Furnishings, and Equipment Stores 58 Eating and Drinking Places 59 Miscellaneous Retail 60 Depository Institutions 61 Non-depository Credit Institutions 62 Security and Commodity Brokers, Dealers, Exchanges, and Services 63 Insurance Carriers 64 Insurance Agents, Brokers, and Services 65 Real Estate 67 Holding and Other Investment Offices 70 Hotels, Rooming Houses, Camps, and Other Lodging Places 72 Personal Services 73 Business Services 75 Automotive Repair, Services, and Parking 76 Miscellaneous Repair Services 78 Motion Pictures 80 Health Services 81 Legal Services 82 Educational Services 83 Social Services 84 Museums, Art Galleries, and Botanical and Zoological Gardens 86 Membership Organizations 87 Engineering, Accounting, Research, Management, and Related Services 99 Nonclassifiable Establishments 5 The descriptions of the Major Groups (2-digit SIC Codes) are from the website of the Occupational Safety & Health Administration (U.S. Department of Labor). 23

24 TABLE 8 Geographical Regions 7 Region 1: Northeast Region 2: Midwest Region 3: South Region 4: West Division 1: New England Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut Division 3: East North Central Ohio Indiana Illinois Michigan Wisconsin Division 5: South Atlantic Delaware Maryland District of Columbia Virginia West Virginia North Carolina South Carolina Georgia Florida Division 8: Mountain Montana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada Division 2: Middle Atlantic New York New Jersey Pennsylvania Division 4: West North Central Minnesota Iowa Missouri South Dakota North Dakota Nebraska Kansas Division 6: East South Central Kentucky Tennessee Alabama Mississippi Division 7: West South Central Arkansas Louisiana Oklahoma Texas Division 9: Pacific Washington Oregon California Alaska Hawaii 7 Regions and divisions appear in Table 6-4 of the Geographic Areas Reference Manual issued by the U.S. Census Bureau. 24

25 REFERENCES Eichenseher, J.W. and Danos, P The Analysis of Industry-Specific Auditor Concentration: Towards an Explanatory Model. The Accounting Review, 56(3): Francis, J. R., Stokes, D. J., and Anderson, D City Markets as a Unit of Analysis in Audit Research and the Re-Examination of Big 6 Market Shares. ABACUS, 35(2): Hogan, C. E. and Jeter, D. C Industry Specialization by Auditors. Auditing: A Journal of Practice & Theory, 18(1): June, A.E Colleges Face Larger Bills as the Number of Big Accounting Firms Shrinks. The Chronicle of Higher Education, 51(49): A27 A30. Krishnan, J A Comparison of Auditors Self-Reported Industry Expertise and Alternative Measures of Industry Specialization. Asia-Pacific Journal of Accounting and Economics, 8(2): Kwon, S. Y The Impact of Competition within the Client s Industry on the Auditor Selection Decision. Auditing: A Journal of Practice & Theory, 15(1): Minyard, D.H. and Tabor, R.H The Effect of Big Eight Mergers on Auditor Concentration. Accounting Horizons, 5(4): Nusbaum, E.E We Need More Than the Big Four. Wall Street Journal, January 25: B2. Tonge, S.D. and Wootton Auditor Concentration and Competition Among the Large Public Accounting Firms: Post-Merger Status and Future Implications. Journal of Accounting and Public Policy, (10): Wolk, C.M., Michelson, S.E., and Wootton, C.E Auditor Concentration and Market Shares in the US: A Descriptive Note. British Accounting Review, (33): Wootton, C.W., Tonge, S.D., and Wolk, C.M Pre and Post Big 8 Mergers: Comparison of Auditor Concentration. Accounting Horizons, 8(3):