Effect of big 8 mergers on audit fees: Evidence from the United Kingdom

After a spate of mergers and near mergers, the Big 8 audit firms became the Big 6 in the late 1980s. Corporate clients, policymakers and academicians expressed interest and concern about the implications of these mega-mergers on the level of competition, concentration in the audit market and fees for external audit services, While corporate clients feared that mergers could restrict choice among auditors and lead to a hike in audit fees, merging firms stated that the mergers were likely to produce economies of scale and lower fees. The purpose of this study is to examine the behavior of audit fees during the period of the mega-mergers. Based on a sample of 270 companies in the United Kingdom audited by the Big 8 firms, the extant audit fee model was tested to ascertain whether the audit fee model differs between the merged and the non-merged firms. Results revealed no evidence to suggest that the fee structure of the merged firms and non-merged firms differed from each other. To test for the effect of mergers on audit fees, a first-difference regression based on Maher et al. (1992) was conducted. The analysis did not reveal any significant increase in the audit fee due to the mergers. The results of the study are consistent with the findings of the National Economic Research Associates (NERA 1992) that competition in the audit market would remain healthy as long as there are no further mergers among the Big 6.