Audit market experienced serious regulatory interventions aiming to restore market confidence and safeguard audit quality levels. These interventions resulted in increased audit market concentration among the Big 4 audit firms. Since audit failures still occur, many regulators are concerned about the oligopoly conditions in the audit market and the possible effects of a Big 4 audit firm failure. In the UK, the government initiated an in-depth public dialogue that raised these concerns and concluded in measures that aim to strengthen regulation and revitalize auditor competition. At the same time, UK authorities anticipate the vital market segment of institutional investors to monitor firms’ management and uphold audit quality.

The metric of discretionary accruals is adopted to proxy audit quality. The empirical results suggest that the impact of the institutional investors’ monitoring action supports better audit quality levels. Concurrently, this impact has non-linear characteristics. As institutional ownership grows, auditors seem to have incentives to offer better auditing services that support audit quality. This leads to a convex relationship between institutional ownership and audit quality. The research design allows for time random effects and spans years 2012-2022. This conclusion supports regulatory initiatives that support auditor competition. The superior audit quality that Big 4 auditors provide, is validated and it would be interesting to test in the near future whether this could be disseminated to smaller peers.

JEL Classification: M41, M42