The Effect of Big Eight Mergers on Auditor Concentration

One of the primary arguments against allowing the Big Eight accounting firms to merge is that some audit firms would possess monopoly power within certain industries, resulting in reduced competition due to increased concentration within the market for audit services. The effect of the actual and proposed Big Eight mergers on auditor concentration is examined. Herfindahl Indexes (HI) are calculated for 40 industries for the years 1983-1988, with a focus on 1988. The results indicate that competitive conditions among the big firms may actually improve with fewer competitors. However, large corporate clients are unlikely to change auditors to a non-big firm. Thus, the effects of the mergers on competition among big firms may be more relevant to consider than the effect on competition among all accounting firms. The mergers of Arthur Young with Ernst & Whinney and Deloitte, Haskins & Sells with Touche Ross have had little, if any, impact on competition within the market structure for auditing services provided by large firms.