Abstract:

Audit market in most countries is characterized by a high concentration of audit firms. The factors that most contributed to the creation of such a market structure include business combinations, economies of scale and high barriers to entry for small audit firms. As a result of such developments, audit firms are now generally divided into two major groups: Big Four and non-Big Four audit firms. The main aim of this paper is to investigate if such strict division can be applied to the audit market in Croatia. In order to gain insight into the structure of the audit market in Croatia, an empirical research based on secondary data was conducted. The data were available for 182 audit firms that have carried out the statutory audit for 2,553 clients in 2014. Measures of descriptive statistics were calculated to identify audit firms that can be considered as statistical outliers according to their size. In order to determine the optimal number of audit firm groups, a hierarchical cluster analysis was applied. The analysis of publicly available data indicates that the strict division of audit firms in Croatia on Big Four and non-Big Four audit firms does not necessarily reflect their size. Measures of descriptive statistics show that the six largest audit firms can be considered as statistical outliers according to almost all observed size variables, while the remaining audit firms significantly lag behind. Although the individual market shares of Big Four audit firms are significant, there are also two additional audit firms that can compete with them based on the size criterion. This is confirmed with the cluster analysis. Therefore, although the audit market in Croatia is significantly concentrated, it is not dominated exclusively by the Big Four audit firms. Research results on the structure of audit market in Croatia can serve as an input to regulators when considering possible measures for reducing market concentration. However, before taking any actions, an additional analysis regarding the effect of audit firm's size on audit quality should be conducted.