Industry Specialization by Auditors

Dramatic changes in recent years in the audit market suggest the timeliness of an investigation of trends in auditor concentration and an extension of prior research (e.g., Danos and Eichenseher 1982). In recent press, large audit firms have claimed that specialization is a goal of increasing importance. Peat Marwick, for example, has restructured along industry lines, claiming to be recruiting professionals for national teams of multidisciplinary experts organized to “focus on the same industry to serve clients optimally.” On the other hand, litigation concerns might prompt auditors to diversify their risks by diversifying their clientele. In this study, we examine trends in industry specialization from 1976 to 1993 and the industry factors which may affect specialization; whether market share increases are greater for audit firms classified as specialists; and whether the nation's largest audit firms have increased their market share in the industries which they have identified as their focus industries. We find evidence that concentration levels have increased over this period, consistent with the claims of the large audit firms. We find that auditor concentration levels are higher in regulated industries, in more concentrated industries and in industries experiencing rapid growth, but lower in industries with a high risk of litigation. Levels of concentration have increased over time in nonregulated industries providing evidence that scale economies or superior efficiencies of heavy-involvement auditors are not limited to regulated industries but extend to nonregulated industries as well. We also find that for the audit firms classified as market leaders at the beginning of the year, market share has increased over time, whereas market share has declined for firms with a smaller share at the beginning of the year. This suggests that there are returns to investing in specialization.

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Industry Specialization by Global Audit Firm Networks

The Accounting Review ◽

10.2308/accr.2009.84.2.355 ◽

2009 ◽

Vol 84 (2) ◽

pp. 355-382 ◽

Cited By ~ 142

Author(s):

Elizabeth Carson

Keyword(s):

Market Share ◽

Industry Specialization ◽

Audit Firm ◽

Global Industry ◽

Audit Market ◽

Audit Firms ◽

Audit Fee ◽

Firm Networks ◽

National Industry

ABSTRACT: This study investigates the role of global audit firm networks in the market for audit services. Underlying theory suggests that there are benefits from the use of network structures, which enable these firms to expand efficiently into the global audit market and to develop global industry specializations. I identify global and national industry specialist auditors via market share metrics based on client assets audited, and use a large sample of 15,583 clients from 62 countries in 2000 and 14,628 clients from 60 countries in 2004. I find in both periods that audit fee premiums are consistently associated with global specialist auditors, irrespective of whether those audit firms are or are not national specialists.

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Resource allocation specialization, market recognition specialization and audit fees: evidence from the Chinese audit market

Corporate Ownership and Control ◽

10.22495/cocv12i4c7p7 ◽

2015 ◽

Vol 12 (4) ◽

pp. 763-778

Author(s):

Yingfei Liu ◽

Chris Patel ◽

Sammy Xiayan Ying ◽

Hao Qiu

Keyword(s):

Resource Allocation ◽

Market Share ◽

Audit Fees ◽

Social Contexts ◽

Industry Specialization ◽

Audit Market ◽

Audit Firms ◽

Anglo American

Existing literature on audit industry specialization in Anglo-American countries often measures industry specialization using firms’ market share in specific industries from market recognition perspective. This paper contributes to the audit industry specialization research by distinguishing between market recognition specialization and resource allocation specialization, and tests their different effects on audit fees in the Chinese audit market. The results support the hypotheses that market recognition specialization is likely to lead to higher audit fees in the whole audit market, resource allocation specialization is likely to lead to lower audit fees in ‘top–ten’ audit firms, and there is likely to be no effect of resource allocation specialization on audit fees in ‘non–top–ten’ audit firms. The findings have implications for the regulators both in China and globally in designing strategies to enhance the functioning of audit firms. Importantly, the findings suggest that economic, political and social contexts of a country cannot be ignored in examining audit industry specialization

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Anticompetitive behaviour in the audit services market by the big audit firms: Evidence over time

Corporate Ownership and Control ◽

10.22495/cocv10i2art5 ◽

2013 ◽

Vol 10 (2) ◽

pp. 56-79 ◽

Cited By ~ 3

Author(s):

Harjinder Singh

Keyword(s):

Multivariate Analysis ◽

Audit Fees ◽

Total Sample ◽

Market Concentration ◽

Observation Window ◽

Audit Market ◽

Auditor Tenure ◽

Audit Firms ◽

Competitive Behaviour ◽

Over Time

This study investigates the existence of anticompetitive behaviour and cartel pricing by the Big4 international providers of auditing services (resulting from the halving in the number of such providers from the Big8 to Big4).This study uses both a composite and dis-aggregated measure for auditor attributes (namely, auditor reputation, industry specialisation, provision of non-audit services and auditor tenure) and regresses the derived measure against changes in audit fees for the periods 2001 to 2003, 2003 to 2005 and 2001 to 2005 for a total sample of 600 firm-year observations.Main results from longitudinal multivariate analysis indicate that there is no significant association between the four auditor attributes utilised in this study with changes in audit fees over the observation window. This study finds no evidence of anti-competitive behaviour and cartel pricing by Big4 auditors resulting from increased audit market concentration. This has implications in relation to the need to consider legislation to reduce the power and influence of the Big4 audit firms and this subsequently has flow-on implications for the management of firms

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Treatment in the at-risk mental state for psychosis - a comparison of four european countries

European Psychiatry ◽

10.1016/s0924-9338(11)73743-9 ◽

2011 ◽

Vol 26 (S2) ◽

pp. 2040-2040

Author(s):

M. Birchwood

Keyword(s):

High Risk ◽

Help Seeking ◽

Healthcare Systems ◽

The Other ◽

Prodromal Symptoms ◽

Risk Research ◽

Treatment Concepts ◽

The Impact ◽

Over Time ◽

At Risk Mental State

EPOS presented a unique opportunity to document all 'treatments as usual' offered and received in the participating centres to help-seeking patients who fulfilled criteria for UHR status. The EPOS centres were drawn from very different healthcare systems, employing different treatment concepts and using different methods of ascertainment. EPOS ascertained n = 245 UHR patients who were then followed up at 9 and 18 months, taking repeat measures of prodromal symptoms (SIPS), PANSS and depression. In this paper I will describe the different treatments offered in each EPOS centre and the impact of each treatment class on the course of symptoms over time, including ‘transition’ to psychosis. These data will have important bearing on the misnomer of the ‘false positive’ in high risk research and on the other risks and outcomes linked to the UHR/PACE paradigm and their treatment.

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Anticompetitive behaviour in the audit services market by the big audit firms: Evidence over time

Corporate Ownership and Control ◽

10.22495/cocv10i4c1art3 ◽

2013 ◽

Vol 10 (4) ◽

pp. 177-199

Author(s):

Harjinder Singh

Keyword(s):

Multivariate Analysis ◽

Audit Fees ◽

Total Sample ◽

Market Concentration ◽

Observation Window ◽

Audit Market ◽

Auditor Tenure ◽

Audit Firms ◽

Competitive Behaviour ◽

Over Time

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The Effect of Engagement Auditors on Financial Statement Comparability

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-19-061 ◽

2021 ◽

Author(s):

Liuchuang Li ◽

Baolei Qi ◽

Jieying Zhang

Keyword(s):

Fixed Effects ◽

Financial Statement ◽

Industry Specialization ◽

Personal Traits ◽

Audit Firm ◽

Audit Firms ◽

Prior Literature ◽

Client Firm ◽

Industry Peers ◽

Over Time

Prior literature finds that audit firm style shapes client firm financial statement comparability (Francis, Pinnuck, and Watanabe 2014). We expect that engagment partners also shape financial statement comparability, and find that two clients audited by the same engagement auditor have more comparable accruals than two clients audited by different auditors. We also find that engagement auditor past comparability style explains new client comparability with industry peers, suggesting that engagement auditor style persists over time. We uncover that auditor personal traits such as gender, experience, qualification, and industry-specialization are associated with higher comparability. Finally, we find that adding the audit-firm, audit-office and engagement-auditor fixed effects sequentially increases the adjusted R2 of our accrual comparability model by 0.6%, 1.9%, and 10%, respectively. Taken together, our findings suggest that the engagement auditors have a distinguishable effect on financial statement comparability that is incremental to the effect of audit firms and offices.

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Spatial Competition at the Intersection of the Large and Small Audit Firm Markets

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-51159 ◽

2015 ◽

Vol 35 (1) ◽

pp. 23-45 ◽

Cited By ~ 16

Author(s):

Kenneth L. Bills ◽

Nathaniel M. Stephens

Keyword(s):

Market Share ◽

Spatial Competition ◽

Audit Fees ◽

Differential Impact ◽

Audit Firm ◽

Audit Market ◽

Big 4 ◽

Audit Firms ◽

The U.S ◽

Jel Classifications

SUMMARY In this paper, we study spatial competition in the U.S. audit market while accounting for its two-tiered nature. We provide evidence on the differential impact that market share distances within and between the players in the large and small audit markets have on competition. We find that the market share distance from small audit firm competitors has a greater effect on the Big 4's audit fees than distances from other Big 4 competitors. This finding suggests that small audit firms play a significant part in the competitive landscape in local markets. Further, we find that audit fees are increasing with the distance between a small audit firm and its closest competing small audit firm while audit fees are decreasing with the distance between a small audit firm and its closest competing large audit firm. This suggests that while obtaining separation in market space from competing small audit firms reduces competitive pressure from other small audit firms, as a small audit firm gets closer to the market space of a large audit firm it is perceived as being more like the larger audit firm and is able to obtain a fee premium like that attained by the larger audit firms. JEL Classifications: M4; M40; M41; M42; M49.

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Learning by Doing? Partners Audit Experience and the Quality of Audit Services

Revista de Contabilidad ◽

10.6018/rcsar.366921 ◽

2020 ◽

Vol 23 (2) ◽

pp. 197-209

Author(s):

Josep García-Blandon ◽

Josep María Argilés-Bosch ◽

Diego Ravenda

Keyword(s):

Audit Quality ◽

Discretionary Accruals ◽

Learning By Doing ◽

Audit Report ◽

Industry Specialization ◽

Audit Market ◽

Specific Experience ◽

Audit Firms ◽

Different Levels

A pesar de la evidencia que sugiere que el conocimiento especializado debería resultar más relevante que el genérico para explicar diferentes niveles de calidad de auditoría asociados a los auditores individuales, ningún estudio hasta la fecha ha abordado el posible impacto diferencial de la experiencia genérica y específica en la calidad de los servicios de auditoría. Nuestro estudio investiga esta cuestión en el mercado de auditoría español. Aproximamos la calidad de la auditoría a partir de los ajustes de devengo discrecionales y la opinión del informe de auditoría; diferenciando entre experiencia específica con el propio cliente, experiencia sectorial y experiencia de auditoría genérica. Como se esperaba, los resultados muestran una mayor calidad de auditoría cuando el cliente es auditado por un socio con mayor experiencia en el sector de actividad del cliente. También observamos que ni la experiencia específica con el propio cliente, ni la experiencia genérica de auditoría del socio auditor son determinantes significativos de la calidad de los servicios de auditoría. Por otro lado, mientras que algunos estudios previos señalan que el conocimiento especializado resulta más relevante que el genérico para explicar la calidad de los servicios de auditoría, este trabajo sugiere que el conocimiento especializado es, de hecho, el único tipo de conocimiento que resulta relevante. Estos resultados pueden tener implicaciones interesantes para las firmas de auditoría. Despite evidence suggesting that specialised knowledge should be more relevant than generic knowledge to explain different levels of audit quality across individual auditors, no study to date has addressed the respective impacts of the industry-specific and the generic audit experience of audit partners on the quality of audit services. Our study investigates this issue in the Spanish audit market. We proxy audit quality by discretionary accruals and by the opinion of the audit report, and differentiate among client-specific experience, industry-specific experience and generic audit experience of individual auditors. As expected, our results show significantly higher audit quality when the client is audited by a partner with stronger industry-specific audit experience. Furthermore, we observe that neither client-specific experience nor generic audit experience of audit partners are significant determinants of the quality of audit services provided by these auditors. These results may have some interesting implications for audit firms. Therefore, whereas some prior studies on the related issue of industry specialization point out that specialised knowledge is more relevant than generic knowledge to explain the quality of audit services, our findings suggest that specialised knowledge is, in fact, the only type of knowledge that seems to matter.

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The economic impact of audit failures

Revista de Contabilidad ◽

10.6018/rcsar.394401 ◽

2022 ◽

Vol 25 (1) ◽

pp. 159-173

Author(s):

Cristina De Fuentes Barberá ◽

Rubén Porcuna

Keyword(s):

Market Share ◽

Relative Number ◽

Economic Consequences ◽

Control Group ◽

Audit Failure ◽

Audit Market ◽

Audit Firms ◽

The Difference ◽

Investigation Process ◽

Public Oversight

This paper examines the economic consequences associated with an audit failure in the field of statutory auditing services, by analyzing changes in the audit firm’s market share around the time of the investigation process undertaken by the Spanish Public Oversight Board. We explore the variations in audit market share by applying the difference in differences method to a treatment group of 70 sanctioned audit firms and a matched control group of 70 non-sanctioned audit firms. The period of analysis covers the years from 1999 to 2015. Our results show that the sanctioned audit firms suffered a significant decrease in their relative number of clients. Moreover, this measure of market share decreased not only after the publication of the sanction disclosure (which may be attributed to reputational losses) but also after the initiation of the investigation (which may be attributed to the firm’s reluctance to audit risky clients). Findings are similar for both small and large firms when the market share is measured in terms of clients, whereas the evidence is weak concerning variations in their turnover-based market share. Our conclusions could be of interest for audit firms and also for audit regulators when designing disciplinary systems. Este trabajo examina las consecuencias económicas asociadas a un fallo de auditoría en el ámbito de los servicios de auditoría legal, analizando los cambios en la cuota de mercado de la firma de auditoría en torno al momento del proceso de investigación emprendido por el Consejo de Supervisión Pública español. Exploramos las variaciones en la cuota de mercado de la auditoría aplicando el método de diferencia en diferencias a un grupo de tratamiento de 70 firmas de auditoría sancionadas y a un grupo de control emparejado de 70 firmas de auditoría no sancionadas. El periodo de análisis abarca los años comprendidos entre 1999 y 2015. Nuestros resultados muestran que las firmas de auditoría sancionadas sufrieron un descenso significativo en su número relativo de clientes. Además, esta medida de la cuota de mercado disminuyó no sólo después de la publicación de la comunicación de la sanción (lo que puede atribuirse a las pérdidas de reputación), sino también después del inicio de la investigación (lo que puede atribuirse a la reticencia de la empresa a auditar clientes de riesgo). Los resultados son similares tanto para las pequeñas como para las grandes empresas cuando la cuota de mercado se mide en términos de clientes, mientras que la evidencia es débil en lo que respecta a las variaciones de su cuota de mercado basada en el volumen de negocio. Nuestras conclusiones podrían ser de interés para las firmas de auditoría y también para los reguladores de la auditoría a la hora de diseñar sistemas disciplinarios.

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Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2003.22.2.33 ◽

2003 ◽

Vol 22 (2) ◽

pp. 33-52 ◽

Cited By ~ 189

Author(s):

Brian W. Mayhew ◽

Michael S. Wilkins

Keyword(s):

Market Share ◽

Cost Savings ◽

Audit Fees ◽

Industry Specialization ◽

Audit Firm ◽

Differentiation Strategy ◽

Market Shares ◽

Audit Firms ◽

Bargaining Position ◽

The Impact

This paper examines IPO audit fees to assess the use of industry specialization as a differentiation strategy by audit firms. We extend existing theory on the impact of industry specialization on audit fees by incorporating Porter's (1985) theory of competition and differentiation. We suggest that market share enables audit firms to gain competitive advantages in terms of cost and service. However, the impact of such advantages on fees depends on whether the audit firm has successfully differentiated itself from competitors within client industries. Our results indicate that as audit firm industry market share increases without a differentiation in market share, the audit fee charged for a given IPO decreases. In the context of Porter (1985), this result suggests that the client is able to bargain for a portion of the auditor's cost savings because the audit firm has not successfully differentiated itself from competitors. In contrast, we show that audit firms that possess significantly higher market shares than their industry competitors earn fee premiums, suggesting that audit firms that have successfully differentiated themselves retain a stronger bargaining position with their clients.

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