University of Kansas Research Reveals Lower Audit Competition Enhances Audit Quality in the U.S. Market

In a recent working paper published by the University of Kansas, researchers challenge the long‑held belief that a crowded audit market automatically leads to higher quality outcomes. By examining the relationship between audit competition, labor hours, and quality indicators, the study finds that firms operating in less competitive environments can actually deliver more efficient and effective audits. The findings have significant implications for auditors, corporate boards, regulators, and students studying accounting and finance.

Understanding Audit Competition in the U.S. Market

The U.S. public‑company audit market is dominated by the Big Four firms—Deloitte, PwC, EY, and KPMG. Because of their scale and expertise, these firms are often perceived as the only viable options for large corporations. Traditional regulatory thinking has assumed that limited competition among a few providers could erode audit quality, prompting calls for increased oversight and potential market entry incentives.

Traditional View vs. New Findings

Conventional wisdom suggests that more providers should spur competition, forcing firms to differentiate on quality and price. However, the University of Kansas study indicates that the audit market’s unique characteristics—such as high entry barriers, specialized knowledge, and client switching costs—alter this dynamic. The research shows that auditors in less competitive settings may use their market power to invest in quality‑enhancing practices, leading to better outcomes.

Methodology Behind the Study

Will Ciconte and co‑author Andrew Kitto employed a rigorous empirical approach to quantify competition and audit quality. Their methodology can be broken down into three key components:

Data Sources and Profit Persistence

The authors used proprietary data on auditor realization rates, which capture the difference between expected and actual audit fees. By analyzing abnormal profitability—profits that deviate from the industry average—they identified firms with persistent profits over time. Persistent profits are interpreted as a proxy for low competition, as they suggest that a firm can maintain higher margins without pressure from rivals.

Measuring Competition and Quality

Competition was measured through regressions of current‑year abnormal profitability on prior‑year abnormal profitability. A strong persistence indicates limited competitive pressure. Quality was assessed using several metrics: auditor labor hours, the frequency of financial statement restatements, PCAOB inspection findings, and discretionary accruals. By regressing these quality indicators on the competition measure, the authors isolated the impact of market structure on audit performance.

Key Findings and Their Implications

The study’s results overturn the assumption that a lack of competition is inherently detrimental. Instead, the authors found:

Efficiency Gains in Low‑Competition Environments

Auditors operating in less competitive markets tended to use fewer labor hours per engagement while maintaining, or even improving, the thoroughness of their work. This suggests that these firms can allocate resources more strategically, focusing on high‑risk areas and leveraging technology to streamline processes.

Quality Metrics: Restatements, Inspection Findings, Accruals

Lower competition correlated with fewer restatements and fewer PCAOB inspection findings—both strong indicators of audit quality. Additionally, discretionary accruals—a measure of earnings management—were lower for firms with persistent profits, implying that auditors were more diligent in detecting and correcting accounting irregularities.

Why Big Four Dominance Matters

The dominance of the Big Four is a double‑edged sword. On one hand, their global reach and deep expertise provide a high baseline of quality. On the other, the concentration can create a perception of complacency. The University of Kansas research suggests that the very concentration may, in some cases, foster a culture of continuous improvement driven by the ability to invest in quality initiatives without the immediate threat of losing clients.

Barriers to Entry and Client Loyalty

High capital requirements, the need for specialized talent, and the integration of advanced audit technology create substantial barriers for new entrants. Clients, in turn, value the consistency and reliability that come from long‑standing relationships with a single firm. This dynamic can reduce the incentive for firms to cut corners, as the cost of losing a client outweighs short‑term gains from lower fees.

Regulatory Perspectives

Regulators have long debated whether to encourage more competition in the audit market. The study’s findings suggest that regulatory changes aimed solely at increasing the number of audit providers may not automatically translate into higher quality. Instead, regulators might focus on transparency, audit firm rotation policies, and robust oversight mechanisms that complement the existing market structure.

Practical Takeaways for Auditors and Companies

Both audit firms and corporate boards can derive actionable insights from the research. Below are several recommendations that align with the study’s conclusions.

Strategic Audit Selection

When choosing an audit partner, consider not only the firm’s market share but also its track record on quality metrics. Firms with persistent profits may have invested more heavily in quality controls, technology, and staff training. A thorough due diligence process that examines restatement history, PCAOB findings, and discretionary accrual trends can help identify partners that consistently deliver high‑quality audits.

Monitoring Quality Beyond Competition

Quality assurance should be an ongoing process. Companies can implement internal audit quality monitoring frameworks that track key performance indicators such as audit hours per engagement, restatement frequency, and client satisfaction scores. By benchmarking against industry peers, firms can spot deviations early and take corrective action.

Future Research Directions

While the University of Kansas study provides compelling evidence, further research can deepen our understanding of audit market dynamics.

Expanding the Dataset

Future studies could incorporate a broader range of audit firms, including mid‑tier and boutique providers, to assess whether the observed relationship holds across different market segments. Additionally, longitudinal data spanning more years would allow researchers to examine how changes in regulation or technology influence competition and quality over time.

Cross‑Country Comparisons

Comparing the U.S. audit market with those in other jurisdictions—such as the European Union or emerging markets—could reveal whether the findings are specific to the U.S. context or reflect a more universal phenomenon. Such comparative analyses would also help regulators design market‑specific policies that balance competition with quality assurance.

Conclusion

The University of Kansas research challenges the conventional narrative that a crowded audit market is a prerequisite for high quality. By demonstrating that lower competition can coexist with, and even enhance, audit efficiency and effectiveness, the study invites auditors, corporate boards, and regulators to rethink how market structure influences audit outcomes. Embracing a nuanced view of competition—one that acknowledges the unique characteristics of the audit industry—can lead to more informed decisions and stronger financial reporting standards.

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