Econometric analysis of audit costs
Deloitte’s response to the Competition Commission's working paper
Deloitte’s response comments on the following areas:
- Economies of scale with respect to auditor size
- Economies of scale with respect to client size
- Economies of scope
- Cost of audits over time
Deloitte has already addressed some of these issues in its response to the CC's Restrictions on entry and expansion working paper and its response to the Issues Statement.
While the working paper shows that there are economies of scale in client size (but no economies of scale in auditor size and no economies of scope), Deloitte would encourage the CC to note that such economies do not constitute a barrier to entry to the large company audit market.
The evidence on the audit cost function put forward in the paper demonstrates that mid-tier auditors either face no barriers to expansion, or, in the case of economies of scale with respect to client size, the cost function attributes actually work in their favour.
In the CC's Restrictions on entry and expansion working paper, it suggested that it would investigate how engagement-related staff costs vary with output. The evidence presented is that there are no economies of scale or scope in engagement-specific labour costs that would give rise to intrinsic barriers to entry, and we would encourage the CC to conclude this particular line of investigation.