Auditor Industry Specialization and Evidence of Cost Efficiencies in Homogenous Industries

2014 ◽  
Vol 90 (5) ◽  
pp. 1721-1754 ◽  
Author(s):  
Kenneth L. Bills ◽  
Debra C. Jeter ◽  
Sarah E. Stein
Keyword(s):  
Service Quality ◽  
Bargaining Power ◽  
Economies Of Scale ◽  
Audit Quality ◽  
Data Availability ◽  
Competitive Advantages ◽  
Audit Pricing ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Cost Efficiencies

ABSTRACT This study examines the audit pricing effects when auditors specialize in industries conducive to transferable audit processes. Our results indicate that industry specialists charge incrementally lower fees in industries with homogenous operations, and particularly in industries with both homogenous operations and complex accounting practices. Moreover, we discover that audit quality is no lower for clients audited by these specialists offering fee discounts, consistent with a conclusion that the reduction in fees indicates cost efficiencies rather than lower-quality audits. Further analysis indicates that the shared economies of scale only occur in a subsample of client firms with relatively high bargaining power. When considered in conjunction with prior research using a survivorship approach, our study provides evidence that certain industries lend themselves to specialization because auditors generate cost-based competitive advantages without compromising service quality. Data Availability: Data are publicly available from the sources identified in the paper.

City-Level Auditor Industry Specialization, Economies of Scale, and Audit Pricing

2012 ◽  
Vol 87 (4) ◽  
pp. 1281-1307 ◽  
Author(s):  
Simon Yu Kit Fung ◽  
Ferdinand A. Gul ◽  
Jagan Krishnan
Keyword(s):  
Bargaining Power ◽  
Economies Of Scale ◽  
Scale Economies ◽  
Audit Fees ◽  
The United States ◽  
Data Availability ◽  
Audit Pricing ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Negative Effect

ABSTRACT We examine the effects of city-level auditor industry specialization and scale economies on audit pricing in the United States. Using a sample of Big N clients for the 2000–2007 period, and a scale measure based on percentile rankings of the number of audit clients at the city-industry level, we document significant specialization premiums and scale discounts in both the pre- and post-Sarbanes-Oxley Act (SOX) periods. However, the effects of industry specialization and scale economies on audit pricing are highly interactive. The negative effect of city-industry scale on audit fees obtains only for clients of specialist auditors. By contrast, clients of non-specialist auditors obtain scale discounts only when they enjoy strong bargaining power, suggesting that auditors are “forced” to pass on scale economies to clients with greater bargaining power. Data Availability: Data are available from sources identified in the article.

Audit Quality and Specialist Tenure

2018 ◽  
Vol 94 (3) ◽  
pp. 113-147 ◽  
Author(s):  
Jennifer J. Gaver ◽  
Steven Utke
Keyword(s):  
Propensity Score ◽  
Propensity Score Matching ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Data Availability ◽  
Client Characteristics ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Big 4 ◽  
Jel Classifications

ABSTRACT We argue that the association between auditor industry specialization and audit quality depends on how long the auditor has been a specialist. We measure audit quality using absolute discretionary accruals, income-increasing discretionary accruals, and book-tax differences. Our results, based on a sample of Big 4 audit clients from 2003–2015, indicate that auditors who have only recently gained the specialist designation produce a level of audit quality that does not surpass that produced by non-specialist auditors, and is generally lower than the audit quality produced by seasoned specialists. We estimate that the seasoning process takes two to three years. In contrast to prior research that finds no effect of specialization after propensity score matching, we find that seasoned specialists generally produce higher-quality audits than other auditors even after matching. This suggests that the audit quality effect associated with seasoned industry specialist auditors is not due to differences in client characteristics. JEL Classifications: M42. Data Availability: Data used in this study are available from public sources identified in the text.

Auditor Industry Specialization and Earnings Quality

2003 ◽  
Vol 22 (2) ◽  
pp. 71-97 ◽  
Author(s):  
Steven Balsam ◽  
Jagan Krishnan ◽  
Joon S. Yang
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
Discretionary Accruals ◽  
Prior Work ◽  
Brand Name ◽  
Absolute Level ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of nonspecialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of nonspecialists.

Auditor Industry Specialization, Client Bargaining Power, and Audit Pricing

2004 ◽  
Vol 23 (1) ◽  
pp. 123-140 ◽  
Author(s):  
Jeffrey R. Casterella ◽  
Jere R. Francis ◽  
Barry L. Lewis ◽  
Paul L. Walker
Keyword(s):  
Bargaining Power ◽  
Audit Fees ◽  
Sustainable Competitive Advantage ◽  
Audit Pricing ◽  
Absolute Size ◽  
Accounting Firms ◽  
Industry Specialization ◽  
Differentiation Strategy ◽  
Audit Market ◽  
A Company

Porter's (1985) analysis of competitive strategy is used to explain industry specialization by Big 6 accounting firms. In Porter's framework, industry specialization can be viewed as a differentiation strategy whose purpose is to create a sustainable competitive advantage relative to nonspecialist auditors. A differentiation strategy will lead to higher audit fees if valued by clients. We find evidence of higher fees for Big 6 industry specialists relative to nonspecialists in the U.S. audit market, but only for companies in the lower half of the sample based on size (assets <$123 million). By contrast, companies in the upper half of the sample do not pay a specialist premium, and audit fees actually decrease as a company becomes increasingly large relative to its auditor's industry clientele. Together these results suggest that audit fees are higher when clients are small and have little bargaining power, but audit fees are lower when clients have greater bargaining power and this is more likely when companies are large in absolute size and large relative to their auditor's industry clientele.

Customer-Base Concentration: Implications for Audit Pricing and Quality

2018 ◽  
Vol 31 (1) ◽  
pp. 129-152 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Panos N. Patatoukas ◽  
Annika Yu Wang
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Customer Relationships ◽  
Data Availability ◽  
Audit Process ◽  
Audit Pricing ◽  
External Auditors ◽  
Customer Base ◽  
Conventional View ◽  
Audit Fee

ABSTRACT What are the implications of major customer dependency, i.e., the degree of a supplier firm's dependency on its major customers, for external auditors? While the conventional view emphasizes the negatives of major customer dependency for client business risk, we find that suppliers with more concentrated customer bases spend less on audit fees. The evidence is consistent with reduced audit effort due to efficiency gains in the audit process, especially when suppliers with more concentrated customer bases share the same auditors with their long-standing major customers. The audit fee discount we identify does not imply that audit quality declines with customer-base concentration. In fact, we find that suppliers with more concentrated customer bases are less likely to experience material restatements of previously audited financial statements. Taking the external auditors' perspective, our study provides new managerial insights on the costs and benefits of major customer relationships for supplier firms. Data Availability: All data are available from sources identified in the text.

National Level, City Level Auditor Industry Specialization and Cost of Debt

2010 ◽  
Vol 24 (3) ◽  
pp. 395-417 ◽  
Author(s):  
Chan Li ◽  
Yuan Xie ◽  
Jian Zhou
Keyword(s):  
Audit Quality ◽  
Credit Rating ◽  
National Level ◽  
Debt Financing ◽  
Cost Of Debt ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Debt Capital ◽  
Bond Spreads ◽  
Industry Specialist

SYNOPSIS: We examine the relation between industry specialist auditors and cost-of-debt financing using a national and city level industry specialist framework. Consistent with the assumption that higher audit quality is associated with lower information risk, which benefits clients in raising debt capital, we find that firms audited by city level industry specialist auditors, either alone or jointly with national level industry specialist auditors, enjoy significantly lower cost-of-debt financing measured by both credit rating and bond spread. Our results suggest that, compared to clients of non-industry specialists, firms’ odds of worse credit ratings are 0.859 (0.664) times lower, and their bond spreads are 17 (16) basis points lower if they are clients of city-level-only (joint national and city level) industry specialists. In addition, our evidence shows that, for joint national and city level industry specialists, both information and insurance roles are significant to reduce cost-of-debt financing.

scholarly journals Does Auditor Industry Specialization Increase Analysts’ Forecast Accuracy? Evidence from the Listed Firms of Australia

2020 ◽  
Vol 16 (3) ◽  
pp. 46
Author(s):  
Aditi Shams
Keyword(s):  
Audit Quality ◽  
Empirical Test ◽  
Forecast Error ◽  
Forecast Accuracy ◽  
Earnings Forecast ◽  
Forecast Errors ◽  
Forecast Dispersion ◽  
Industry Specialization ◽  
Listed Firms ◽  
Auditor Industry Specialization

This paper examines the relation between auditor industry specialization and analysts’ beginning-of-the-year earnings forecast accuracy. It predicts that the higher industry specialization of the auditors will improve the quality of external financial reports and thus mitigates the analysts’ forecast error. It also predicts that higher audit quality will have a negative association with analyst forecast dispersion. The empirical test results on Australian listed firms from the year 2003 to 2012 does not find evidence of association between audit firm industry specialization and analysts’ beginning-of the year earnings forecast error. However, firms with higher analysts forecast error is associated with lower forecast dispersion among analysts, which is consistent with the prediction that analysts are consistent with predicting future earnings and analysts possess similar traits in terms of difference with the actual earnings. Additional analysis also finds that’s larger firms have less forecast errors compared to smaller firms. The findings contribute to the growing literature on auditing and financial reporting quality in Australian context.

Client-Auditor Supply Chain Relationships, Audit Quality, and Audit Pricing

2014 ◽  
Vol 33 (4) ◽  
pp. 119-166 ◽  
Author(s):  
Karla M. Johnstone ◽  
Chan Li ◽  
Shuqing Luo
Keyword(s):  
Supply Chain ◽  
Audit Quality ◽  
National Level ◽  
Audit Fees ◽  
Audit Pricing ◽  
Industry Specialization ◽  
Supply Chain Relationships ◽  
Revenue Cycle ◽  
The City

SUMMARY: We investigate the association between auditors' supply chain knowledge and companies' audit quality and audit pricing. Auditor supply chain knowledge is a specialized understanding of information and processes regarding accounting and auditing issues that relates to both a supplier and its major customer, regardless of industry commonalities, that is particularly useful for understanding complexities associated with the revenue cycle. We find that auditors' supply chain knowledge at the city level is associated with higher audit quality and lower audit fees, compared to companies employing auditors with supply chain knowledge at the national level or employing auditors without supply chain knowledge. Such effects are stronger for supplier companies that derive a high proportion of revenue from their major customers, and when the revenue cycle for the supplier companies is more important. We obtain these results while controlling for the usual determinants of audit quality and fees, along with auditors' industry specialization.

Do Industry-Specialist Auditors Influence Stock Price Crash Risk?

2014 ◽  
Vol 34 (3) ◽  
pp. 47-79 ◽  
Author(s):  
Ashok J. Robin ◽  
Hao Zhang
Keyword(s):  
Stock Price ◽  
Audit Quality ◽  
Tax Avoidance ◽  
Accounting Conservatism ◽  
Crash Risk ◽  
High Quality ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Governance Roles ◽  
Industry Specialist

SUMMARY Francis (2011) calls for more research on “the effect of audit quality on economic outcomes.” We respond by examining whether high-quality auditors reduce stock price crash risk, an important consideration for stock investors. We argue that high-quality auditors reduce crash risk because of their information intermediary and corporate governance roles. Using a large sample of U.S. stocks spanning the period 1990–2009, we examine the issue empirically by using auditor industry specialization as our proxy for auditor quality. Our main finding is a statistically significant and negative association between auditor industry specialization and stock price crash risk, implying that high-quality auditors can directly benefit investors by reducing tail risk. In addition, we provide evidence that industry-specialist auditors moderate the effects of opacity, accounting conservatism, and tax avoidance on crash risk. Finally, our main finding of a negative relation between auditor industry specialization and crash risk is robust to using city-level industry specialization as an alternate measure. JEL Classifications: G19; G32; M42.

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