Effects of the PricewaterhouseCoopers merger on the UK audit services market

Purpose - This paper seeks to investigate the effect of the PricewaterhouseCoopers (PwC) merger on the market for audit services in the UK. To this end a "what if"analysis is conducted comparing estimated outcomes prior to the merger with those expected under post-merger conditions. Particular attention is given to the effect of the merger on the relative performance of the top tier and non-top tier audit firms. Design/methodology/approach - The paper employs a Markov chain model to estimate the long-term market shares of audit firms' pre-merger and post-merger. Concurrently, an optimisation model is employed to generate parameters reflecting the relative attractiveness of audit firms and the probability that a client company continues with the current audit firm. Findings - Prior to the PwC merger, this model would predict a large reduction in the share of the non-Big Six from 17 per cent to a long run 7 per cent. However, the effect of the PwC merger appears to be that the position of the non-Big Five has been improved and the model predicts a slight increase in long-term market share to 18 per cent. Research limitations/implications - The Markov model employed makes a number of assumptions that may restrict the generality of the implications that can be drawn from the analysis. Practical implications - The results show that, contrary to the worries of the competition authorities, the long-term impact of the PwC merger, ceteris paribus, would be to improve the position of the non-top tier of auditing firms. Originality/value - Auditor concentrations studies have been mostly descriptive. This paper reports an analytical study of the potential effect of audit mergers on market concentration.