Concentration Dynamics in the Market for Audit of Public Interest Entities in Latvia

This paper studies the dynamics of concentration levels in the market for audit of public interest entities (further PIEs) in Latvia from 2016 to 2018. This is important to identify initial effects on concentration and the likely consequences of the new EU statutory audit legislation (i.e. Directive 2014/56/EU and Regulation 537/2014) entered into force in June 2016. This paper relies primarily on the analysis of the annual reports of Latvian PIE audit firms and their associates and computes some key measures describing concentration – the Herfindahl-Hirschman index and concentration ratios CR₁ or CR₄. It also analyses market concentration in different categories of PIEs, notably banks. The main findings are that the concentration of the market for Latvia’s PIE audit firms/networks remained relatively high after the EU audit reforms. Furthermore, the Big Four firms’ effectively have an oligopoly in the PIE audit market and one of the Big Four firms is dominant in the banking sector. The authors develop recommendations aimed to make the Latvian audit market more transparent and less concentrated.