By Professor Matthew Pinnuck and Amir Ghandar FCA

There have been ongoing concerns raised and commentary about the audit market becoming anti-competitive due to its concentration. However, despite much flagellation, there has been scant evidence provided to support this claim.

In a competitive market, fees should reflect costs. If fees significantly exceed costs, it suggests anti-competitive actions. The percentage fee changes from both large audit firms and smaller and mid-tier firms show no sign of such behaviour in the Australian audit market.

Examining the patterns

Over the decade from 2013 to 2022, the median percentage change in audit fees was similar for both large, and smaller and mid-tier firms, at 3.7% and 3.1% respectively. A graph illustrating this change over time (below) indicates that when costs shift, both these entities adjust their fees similarly.

For instance, in 2022, a widely recognised surge in costs affected many industries. Consequently, large and smaller and midtier audit firms increased their fees by comparable rates: 10.74% and 8.88%, respectively. This supports the notion of a competitive market.

In addition, both large and smaller and mid-tier firms have a very similar number of clients that experienced fee decreases – 35% and 37% respectively – which is another indicator of a competitive environment.

While most global industries are concentrated, many show no signs of anti-competitive actions. Similarly, the Australian audit market, at least based on the core metric of fee setting, doesn’t exhibit anti competitive behaviour.

Graph: Percentage audit fee changes in Australia. Click image to enlarge.

How concentrated is the audit market?

Commentary around concentration in the Australian audit market has tended to ebb and flow with wider debates on audit and audit firms, and both have been a focus in recent times. Senators and other commentators have raised questions about whether a market with a big four cohort is too concentrated, echoing concerns that have been levelled in other countries.

Recent research indicates that while the top end of the ASX audit market is moderately to highly concentrated, overall the market has a low level of concentration. These were among the findings of a recent study (Audit Market Structure, Concentration, and Competition in Australia 2019–2022) conducted by Dr Sarowar Hossain and Professor Gary Monroe of UNSW, and supported by major accounting bodies including CA ANZ.

The research found that, over time, the largest firms’ market share was gradually declining and being picked up mainly by mid-sized firms, whose market share increased over the study period.