Fewer Auditors in the Game, Perfectly Fine Audits? Sure, Why Not

Remember two years ago when we started hearing about smaller-but-not-small firms getting out of the SEC audit game? We’re not talking XYZ CPA LLP and its two boomer partners, we’re talking names you actually know like Armanino and CLA. We’re still not entirely sure why these firms started bailing out. It was just around the time private equity investment in the accounting profession was ramping up and an audit practice fully attached to a private equity-owned entity is, as of now anyway, verboten so perhaps at least some of the firms making their exit were thinking bigger than just getting the PCAOB off their backs.

This phenomenon led to observers of the profession (particularly the cynical ones) wondering if the lack of competition and choice in the market could impact audit for the worse but according to this recent working paper by Will Ciconte, assistant professor of finance at the University of Kansas and co-author Andrew Kitto of the University of Massachusetts Amherst, it may not be a bad thing after all. Keeping in mind of course that this is research and unlike shitposts you read on Reddit, should not be taken as absolute, indisputable fact. Also keeping in mind that the researchers’ data came from a sample from the PCAOB’s Annual Data Request (ADR) database that led to a panel dataset of all Big 4 engagements involving SEC issuers from 2008-2016 so we’re not talking about Armanino or CLA circa 2023.

The abstract:

This study investigates the relation between audit competition, audit quality, and auditor labor hours. Using proprietary data on auditor realization rates, we construct new measures of competition based on theory predicting that abnormal profits will quickly disappear when competition is high but persist over multiple periods when competition is low. We find consistent evidence of persistent abnormal profits among U.S. Big 4 engagements and that individual offices earn persistent abnormal returns suggesting that the market is not perfectly competitive. Examining the consequences of lower competition, we find that profit persistence is negatively related to audit hours and positively related to audit quality. Although we are cautious about inferring causality, our findings suggest that lower competition is associated with more efficient and effective audits.

“We don’t find any evidence that a lack of competition is problematic,” he said in this KU article. “It turns out that auditors who appear to be operating in less competitive markets are more efficient and more effective.”

Peep the article:

Their study focuses on profit persistence (i.e., profits are “sticky” over time). They find certain audit offices have abnormal profits and there does not seem to be enough competitive pressure to drive down those profits over time. This provides evidence supporting concerns expressed by the audit regulator that the audit market lacks competition.

“We interpret the evidence as suggesting auditors with persistent profits are just providing better audits,” he said.

For the main analysis, Ciconte and Kitto measure competition using regressions of abnormal profitability in the current year on abnormal profitability in the prior year. (Abnormal profitability refers to the difference between the profitability for a given audit engagement compared to all engagements in the same year.)

Ciconte said, “We use this measure to explore whether higher profit persistence, which we use as a measure for low competition, is related to auditor effort and quality. We test this by regressing auditor hours, financial statement restatements, PCAOB inspection findings and discretionary accruals on our competition measure.”

Any analysis of audit firm competition wouldn’t be complete without getting some quotes from the researchers on the four firms that together serve 49.7% percent of all SEC-registered companies and 89.5% of large accelerated filers. Don’t worry, they did that.

“For many of these companies, they can’t get an auditor that’s outside of the Big Four because there’s a need to invest in technology and knowledge and skills to serve the client,” Ciconte said.

“There’s this concern, ‘We only have these four firms that can serve this pool of clients. They don’t have an incentive to do a good job.’ We say, ‘Let’s see what competition looks like inside these markets. And then if we are detecting that there appears to be less competition, what are the implications for stakeholders?’”

Given that Ciconte found a lack of competition wasn’t problematic, then wouldn’t the audit quality be the same if a company were to switch to any of the other Big Four?

“Because these auditors are able to develop skill and expertise which they can then exploit, this creates a barrier so another firm can’t just come in and say, ‘Hey, you should come with us.’ Because switching off that auditor will be costly to the clients. The clients are willing to stick with them because they figured out a way to develop their processes, to get the right people in place to do good work and to get to a quality answer that is not replicable by a competitor,” he said.

We trust the comment section can offer their theories on the variety in audit quality across firms that are otherwise quite similar should they feel compelled to do so. Feel free to throw out any other observations or thoughts you may have floating around in your head after reading this paper.

Profit Persistence in the U.S. Audit Market was published in Journal of Accounting Research in November 2025.