Audit Market Concentration, Competition, and Audit Quality in an Emerging Economy: The Case of Nigeria

This study provides a comprehensive analysis of the structure, competitive dynamics, and quality implications of Nigeria's audit market, contributing original empirical evidence to the global debate on whether audit market concentration improves or undermines audit quality. Nigeria's audit market is characterized by significant concentration at the top, where the Big Four firms dominate listed company engagements, and fragmentation at the bottom, where hundreds of small and micro-audit firms serve unlisted entities. This structure raises important regulatory questions about audit market competition, entry barriers, and the quality differentiation between market segments. This study uses a dataset of audit engagements for all 170 companies listed on the Nigerian Exchange Group from 2010 to 2023, combined with Financial Reporting Council of Nigeria audit inspection reports and Institute of Chartered Accountants of Nigeria membership data. Audit market concentration is measured using Herfindahl-Hirschman Index calculations at sector level. Audit quality is proxied by discretionary accruals, opinion modifications, and audit report lag. Barriers to entry are assessed through capital requirement analysis, client relationship stickiness measures, and regulatory certification cost estimation. Dynamic panel regression and endogeneity-corrected fixed effects models are employed. Results reveal a significant positive relationship between auditor market power, measured by individual firm client concentration, and audit quality, consistent with a reputation maintenance model. Sector concentration beyond a critical threshold is, however, associated with quality stagnation, suggesting diminishing governance benefits of extreme concentration. The study contributes an original Nigerian audit market structure-quality model and recommends Pro-competition audit procurement policies for large public interest entities.

Keywords: audit market concentration, competition, audit quality, Nigeria, Big Four.