Auditor Industry Specialization and Audit Pricing and Effort

2018 ◽  
Vol 38 (1) ◽  
pp. 51-75 ◽  
Author(s):  
Gil Soo Bae ◽  
Seung Uk Choi ◽  
Jae Eun Lee
Keyword(s):  
Production Efficiency ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Pricing ◽  
Firm Level ◽  
Accounting Firms ◽  
Industry Specialization ◽  
Audit Firms ◽  
Audit Production ◽  
Industry Expertise

SUMMARY We find that auditor industry expertise is both a firm-level and partner-level phenomenon, which suggests that industry expertise captured by accounting firms is dispersed among engagement partners through knowledge sharing and transfers within audit firms. We also find that the higher audit fees by expert auditors are due to more hours and not higher rates. While spending more hours allows expert auditors to extract higher fees in total, the finding that expert firms/partners exert greater effort does not support the suggestion that expert auditors are in general more efficient in audit production. However, we find weak evidence that audit hours for expert auditors are lower in industries and companies with homogenous operations and comparable accounting than in other industries and companies. This finding suggests that knowledge transfers more likely take place in homogeneous and comparable industries, leading to production efficiency that moderates the increase in audit hours charged by experts. JEL Classifications: M4; M42. Data Availability: All data are available from the identified sources.

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.

The Effect of Supply Chain Knowledge Spillovers on Audit Pricing

2013 ◽  
Vol 26 (1) ◽  
pp. 83-100 ◽  
Author(s):  
Jengfang Chen ◽  
Hsihui Chang ◽  
Hsin-Chi Chen ◽  
Sungsoo Kim
Keyword(s):  
Supply Chain ◽  
Knowledge Spillovers ◽  
National Level ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Pricing ◽  
Audit Firm ◽  
Audit Firms ◽  
Negative Effect ◽  
Office Level

ABSTRACT We present evidence on the effect of audit firms' supply chain knowledge spillover on audit pricing. Analyzing data from Audit Analytics and Compustat for the seven-year period from 2003 to 2009, we find that audit firms' supply chain knowledge has a negative effect on audit fees. Specifically, an audit firm with more supply chain knowledge charges lower audit fees to its clients when the firm also audits its clients' major buyers. In addition, we find that the fee discount is greater when the audit firm possesses major buyer-related supply chain knowledge at the office level compared to the national level. Our findings are consistent, albeit weaker, to an expanded sample of companies that voluntarily disclose their major buyers. Data Availability: The data are publicly available.

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.

CEO Turnover and Audit Pricing

2014 ◽  
Vol 28 (2) ◽  
pp. 297-312 ◽  
Author(s):  
Hua-Wei Huang ◽  
Robert J. Parker ◽  
Yun-Chia Anderson Yan ◽  
Yi-Hung Lin
Keyword(s):  
Voluntary Turnover ◽  
Audit Fees ◽  
Ceo Turnover ◽  
Data Availability ◽  
Predictor Variables ◽  
Audit Pricing ◽  
Audit Firm ◽  
Audit Firms ◽  
And Control ◽  
The Relationship

SYNOPSIS This study examines the relationship between CEO turnover in client companies and the fees charged by their audit firms. We propose that forced CEO turnover (such as dismissals) pose higher business and audit risks for the audit firm than voluntary turnover (such as retirements); further, greater risk leads to higher audit prices. We develop a regression model of audit fees that includes, as predictor variables, type of CEO turnover and control variables identified in prior studies (e.g., ROA, total assets, and corporate governance). Results reveal that companies with forced CEO turnover have significantly higher audit fees than companies with either voluntary turnover or no turnover. Further, we find no difference in audit fees between firms with voluntary turnover and firms without turnover. Data Availability: The data used in this study are publicly available.

Long-Term Trends in Audit Fees

2001 ◽  
Vol 20 (1) ◽  
pp. 115-136 ◽  
Author(s):  
Krishnagopal Menon ◽  
David D. Williams
Keyword(s):  
Audit Fees ◽  
Accounting Firms ◽  
Industry Specialization ◽  
Expectation Gap ◽  
Long Term Effect ◽  
Audit Fee ◽  
Model Coefficient ◽  
Long Term Trends ◽  
Wage Increases

The audit fees literature contains little by way of systematic evidence on long-term trends in audit fees. This study analyzes trends in audit fees from 1980 through 1997, adjusting for changes in client size, complexity, and risk. The sample is restricted to clients of Big 6 firms that voluntarily disclosed audit fees in the period 1980–1997. Evidence is found that audit fees increased in the 1980s but stayed flat in the 1990s. Most important, a significant increase is noted in 1988, the year in which the Auditing Standards Board issued the “expectation gap” standards. These results hold even after controlling for wage increases in accounting firms, suggesting an expansion of auditing effort. There is no evidence that auditors obtain any price premium from industry specialization. The 1989 Big 8 mergers appear to have had a short-term, but not long-term, effect on fees. Finally, the magnitude of the audit fee model coefficient for accounts receivable and inventory has declined over the period, presumably due to productivity improvements.

The effect of Legal Entity Identifiers on audit fee changes

2021 ◽  
Author(s):  
Ju-Chun Yen
Keyword(s):  
Empirical Evidence ◽  
Learning Effect ◽  
Audit Fees ◽  
Policy Implications ◽  
Brand Name ◽  
Legal Entity ◽  
Audit Firms ◽  
Audit Fee ◽  
Legal Entities ◽  
Industry Expertise

This study investigates whether a client's use of a Legal Entity Identifier (LEI) is associated with audit fee changes. An LEI uniquely identifies different legal entities worldwide, making audit clients' transactions and related parties more transparent and traceable, potentially reducing auditors' costs and audit risks, as reflected in audit fee changes. Using a sample of U.S. firms, I find that audit fees increase more for LEI firms than for non-LEI firms within the first few years of LEI registration, but they increase less for LEI firms than for non-LEI firms afterward. The results support a reduction in audit costs due to LEIs, with a learning effect. I also find that audit firms' brand name and industry expertise strengthen this association. This study provides initial empirical evidence of the effects of LEI and policy implications.

Auditor Rotation and Perceived Competence and Independence: The Effect of Fees and Industry Specialization

2018 ◽  
Vol 17 (3) ◽  
pp. 153-175
Author(s):  
Roger Kamath ◽  
Ting-Chiao Huang ◽  
Robyn A. Moroney
Keyword(s):  
Audit Fees ◽  
Perceived Competence ◽  
Data Availability ◽  
Industry Specialization ◽  
Auditor Rotation ◽  
Jel Classifications ◽  
Attention To Detail ◽  
Industry Specialist

ABSTRACT Regulators and practitioners argue the relative merits of firm and partner rotation, while researchers report mixed results on the consequences of rotation. This study uses an experiment to examine the effect of an upcoming rotation on perceptions of auditor competence and independence and finds that participants appear to be indifferent to whether rotation is at the firm or partner level; they only react to concurrent changes in audit fees and the industry specialization status of the new auditor. Specifically, participants assess auditor competence and independence (specifically attention to detail, effort, and skeptical attitude) to be higher when fees increase rather than decrease significantly at the time of a rotation, and they assess auditor competence to be higher when rotation is to an industry specialist rather than a nonindustry specialist. These findings hold regardless of whether rotation is at the firm or partner level. JEL Classifications: M42. Data Availability: Data and the tasks used in this study are available on request.

Hiring Auditors with a Part II Quality Control Report: An Opportunity for Increased Earnings Management or Lower Audit Fees?

2020 ◽  
Vol 5 (1) ◽  
pp. 73-93
Author(s):  
Jared Eutsler ◽  
D. Kip Holderness ◽  
Megan M. Jones
Keyword(s):  
Quality Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Fiscal Year ◽  
The Public ◽  
Audit Firms ◽  
Public Company ◽  
General Demand ◽  
Systemic Quality

ABSTRACT The Public Company Accounting Oversight Board's (PCAOB) Part II inspection reports, which disclose systemic quality control issues that auditors fail to remediate, signal poor audit quality for triennially inspected audit firms. Auditors that receive a Part II inspection report typically experience a decrease in clients, which demonstrates a general demand for audit quality. However, some companies hire auditors that receive Part II inspection reports. We examine potential reasons for hiring these audit firms. We find that relative to companies that switch to auditors without Part II reports, companies that switch to auditors with Part II reports have higher discretionary accruals in the first fiscal year after the switch, which indicates lower audit quality and a heightened risk for future fraud. We find no difference in audit fees. Our results suggest that PCAOB Part II inspection reports may signal low-quality auditors to companies that desire low-quality audits. Data Availability: Data are available from the public sources cited in the text.

The effects of industry expertise on cost of debt: an individual auditor-level analysis

2017 ◽  
Vol 25 (3) ◽  
pp. 322-334 ◽  
Author(s):  
Ying-Chieh Wang ◽  
Hua Wei Huang ◽  
Jeng-Ren Chiou ◽  
Yu Chieh Huang
Keyword(s):  
Policy Implications ◽  
Cost Of Debt ◽  
Firm Level ◽  
Industry Specialization ◽  
Content Type ◽  
Asian Context ◽  
The Interest Rate ◽  
The Individual ◽  
The Cost ◽  
Industry Expertise

Purpose The purpose of this paper is to examine the association between the cost of debt (COD) and auditor industry expertise using Taiwanese data. Since previous studies (Li et al., 2010) have only examined the relation between industry specialization and COD at the audit firm level in western countries, the authors further examine the association between industry specialization and COD at the individual auditor level in an Asian context. Design/methodology/approach The authors use the interest rate on the firm’s debt as a proxy variable for the COD (Francis, Khurana and Pereira, 2005). The authors adopt three different methods to measure industry specialization, which consist of the auditors’ market share in terms of client sales and number of clients, and client assets. Findings The results indicate that the clients of industry specialists at individual auditor levels have a lower COD. Originality/value First, the authors extend the research of Li et al. (2010) and find that the clients of individual auditor industry specialists also have a lower COD. Second, the authors also believe the evidence on the effects of industry expertise at the individual auditor level may have policy implications for regulators and public investors. Finally, in contrast to works carried out in the US market, the authors provide empirical evidence for the relation between industry specialization and COD in an Asian market.

Does Audit Fee Homogeneity Exist? Premiums and Discounts Attributable to Individual Partners

2011 ◽  
Vol 30 (4) ◽  
pp. 249-272 ◽  
Author(s):  
Stuart D. Taylor
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Market ◽  
Homogeneity Assumption ◽  
Audit Firms ◽  
Audit Fee ◽  
Using Data ◽  
The Individual ◽  
Made In

SUMMARY This paper investigates the implied assumption, made in many audit fee determination studies, that, within a given audit firm, all partners produce a statistically identical level of audit quality and earn a statistically identical level of audit fees. This is referred to as the “homogeneity assumption.” However, this is contradicted by the individual auditor behavioral literature, which shows that different individual auditor characteristics can have an impact on audit quality. Given the fact that audit partners differ in their quality, this paper hypothesizes that different audit partners will be able to earn differing levels of fees. This hypothesis is tested by estimating an audit fee model using data from 822 Australian publicly listed companies for the year 2005. Australia is an ideal audit market for this research, as the disclosure of the name of the audit engagement partner in the audit report is mandatory. The empirical results indicate that individual audit partners earn individual audit fee premiums (or discounts) that are not explainable by the audit firms of which they are members. Data Availability: All data have been extracted from publicly available sources.

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