BKAA5013ISSUES IN AUDITING AND INVESTIGATION

SECOND SEMESTER 2015/2016 (A152)

PREPARED FOR:DR. ROHAMI BIN SHAFIE

 PREPARED BY:

Aliyu Usman Shehu 818419

1) The research problem and issue2) The purpose of the study 3) The motivation of the study 4) In depth review of the literature5) The theories behind the study6) The research method and rational to use the method .7) The findings and the discussion of the study.8) Implications of the study 9) Future study 10)Limitation of The study

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Table of Contents

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The research problem and issueThe research problem and issueThis paper examines three issues raised by the two mergers of Big 8 accounting firms. First, the paper examines, through the use of concentration ratios and Herfindahl indices, the effects of the mergers upon concentration on NYSE, AMEX, and OTC companies. Second, concentration is examined on the basis of the audit fees of the major accounting firms. Third, the paper concludes with a discussion of the impacts of the mergers, both at the level of the individual firms involved, and at the level of the large client audit industry. 3

The purpose of the study

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The purpose of the study is to examine pre and post-merger levels of concentration.

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The motivation of the studyThe motivation of the study

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Along with this growth through merger, it has come persistent apprehension by individuals in the public sector regarding the effect of increasing concentration on competition among accounting firms. Concerns have focused on possible monopoly power, the loss of objectivity and independence and the related impact on the value of the audit report if a few firms were allowed to dominate the industry.

In depth review of the literature

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There is a growing body of literature given by Goldberg (1973) which found no significant increase in the market share or growth rate of 44 companies that had merged. In a much larger study of a 1,000 companies, Mueller (1985), concluded that companies involved in mergers did not increase their market shares or growth rates when compared to companies that did not merge. And, Perry and Porter (1985, 226) argued that "the output of the merged firm declines relative to that of its partners prior to the merger.”

Tomczyk and Read (1989) examined concentration directly using major accounting firms' audit revenues and found the audit market less concentrated than when surrogates for audit fees were used.

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Cont…………Copley (1993) investigated the impact of the Big 8 mergers on the

local availability of Big 8 of- fices and on municipal audit fees. Results in- dicated that a reduction in available Big 8 firms occurred in locations with four or more pre-merger firms. No evidence was found to indicate that the number of Big 8 firms com- peting at the local level affected audit pricing.

Minyard and Tabor (1991) and Tonge and Wootton (1991) both examined the pro forma impact of the 1989 Big 8 mergers. Although the two studies used different measures of concentration (Herfindahl index, Minyard and Tabor; concentration ratios, Tonge and Wootton), the studies reported similar conclu- sions. Specifically, both studies predicted that the mergers would have little impact on com- petition and, because of a more balanced mar- ket, could actually increase competition in the audit industry.

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The theories behind the studyThe theories behind the study

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This study uses both concentration ratios and Herfindahl indices to analyze concentration within the large client audit industry.

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The research method and rational to use the methodThe research method and rational to use the method The use of a broad diverse population base (such as a stock exchange) allows the re- searcher to determine whether auditor con- centration is present within an audit market not merely within a selected industry. We in- clude NYSE, AMEX, and OTC companies, as prior studies (McConnell 1984; Tonge and Wootton 1991) have shown that each of these three security markets provides a unique market for audit services. Accounting firms that are successful in seeking and securing clients in one audit market are not always as successful in (or focus their efforts on) the other audit markets. 9

Cont…..

Companies listed on the NYSE, AMEX, or traded on the OTC market were obtained from the May 1989 and 1992 series of Compact Dis- closure for fiscal year ends 1988 and 1991, respectively. Companies that were acquired, went private, or had information missing were excluded. The usable data sets were 5,962 companies for fiscal year 1988 and 5,777 com- panies for fiscal year 1991. The decrease rep- resents the net of 59 fewer AMEX companies, 188 fewer OTC companies, and 62 additional NYSE companies in the 1991 data set.

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The Findings and the discussion of the study

The results indicate that the mergers resulted in increased concentration ratios, whether measured by the number of firms audited, client revenues, or audit fees, at the four, six, and eight firm levels.

A comparison of the pre and post-merger four and six firm Herfindahl indices indicate fairly consistent movement toward the equal size (1/n) index.

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The eight firm Herfindahl indices indicate that the difference between the pre-merger Big 8 firms, and the largest eight firms today is significantly different.

So, while the access to the market for audit services appears to be more balanced among the largest firms, the distinction between the first tier firms and other firms is greater than ever.

Cont…..

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Implication of the Study

This study does not guarantee increased competition, but it does indicate a market with generally equal access by the top firms. As would be expected, the eight firm Herfindahl indices indicate that the difference between the pre-merger Big 8 firms and the largest eight firms today is significantly different.

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Conclusion

There is no direction for future study

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Future study

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Limitation Of the Study

1.There were no Hypothesis development:- The researchers did not develop hypothesis .

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