The impact of audit market structure on fees charged for audits of the public traded companies: Evidence from Luxembourg

Abstract

This research examines the level of concentration in the auditing sector and its impact on the price of audit services. The sample consists of 13 Luxembourgish listed companies from different sectors, which were audited by both BIG4 and non-BIG4 auditing firms. This research conducted an initial analysis of the market structure of the audit market in Luxembourg. The main emphasis was on the segment of listed companies, and the analysis focused on computing the level of concentration within the studied segment. The findings confirm the highly concentrated situation in the auditing sector in this country. The second research question examined the existence of a positive correlation between the auditor's market position and the fees they charge. In order to examine this, a statistical model was constructed, including characteristics that have been previously identified as significant in predicting audit fees. The variable POWER was assessed, being defined as the mean market share of auditors within the segment of listed entities. The findings demonstrated a positive association between auditing costs and the auditor's market power, showing that when an auditor's market share grows, their fees also increase. The last question addressed the degree of market concentration and the influence of the regulatory change on it. The analysis of the studied segment from 2016 to 2023 reveals a significant market concentration, as shown by the audit fees (CR4>90%). There was also a slight increase tendency (+0.89%) in market concentration throughout this time period. The increasing trend demonstrates that the new Audit Reform, which mainly targets publicly traded companies, is not achieving its desired goals.