Abstract:
The merger between Arthur Andersen (AA) and Ernst & Young (EY) in
Australia was announced on the 16th May 2002. The merger was the culmination of
seven months of speculation and drama surrounding the future of AA, following its
involvement in the collapse of Enron in the United States of America (US). With the
number of Big N firms having been reduced to four, concerns were raised over the
impact of the merger on the competitiveness of the Australian audit services market
(Boreham, 2002; Robertson, 2002; Hamilton et al., 2008).
The objective of the thesis is to evaluate the impact of the merger of AA and
EY on the market for audit services in Australia. In this regard, consideration is
given to two specific questions. First, whether the Australian audit services market
became less competitive subsequent to the merger of AA and EY. Second, whether
any benefits, either in relation to audit pricing or efficiency, accrued to the firms
involved as a consequence of the merger. In order to address these objectives, the
impact of the merger on Australian listed firms is examined. This was done for both
the market as a whole, as well as for the clients of EY. The sample was drawn from
the 1271 available firms on the Australian Stock Exchange (ASX) in 2002.
The results show that the audit services market in Australia is still
competitive subsequent to the merger of AA and EY. This is so, even though the
changes in concentration would suggest that anti-competitive effects could be
occurring. One possible explanation for these findings is that the measures of market
concentration as identified in the industrial organization literature are difficult to
apply to audit firms. Additionally, the lack of benefit to EY from the merger, either
through increased pricing or efficiency, may simply be due to 2002 being too early
for benefits to be realised, possibly due to the stickiness of audit service fees
(Ferguson et al., 2005) or merger implementation issues (Lawrence and Glover,
1998).
