Auditor Industry Specialization and Market Segmentation: Evidence from Hong Kong

2000 ◽  
Vol 19 (1) ◽  
pp. 49-66 ◽  
Author(s):  
Mark L. DeFond ◽  
Jere R. Francis ◽  
T. J. Wong
Keyword(s):  
Hong Kong ◽  
Market Segmentation ◽  
Audit Fees ◽  
Market Segment ◽  
Brand Name ◽  
Accounting Firms ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Production Economies ◽  
Market Leader

Audit fees of Big 6 and non-Big 6 accounting firms are examined for 348 publicly listed Hong Kong companies. Using more recent data than prior studies, we find evidence of Big 6 premiums for both general brand name and for industry specialization. In addition, we find that the large local firm Kwan Wong Tan & Fong, which is the market leader in the property sector, has significantly lower fees than both Big 6 and other non-Big 6 auditors in that industry. Specialization thus leads to different results for Big 6 and non-Big 6 firms and suggests a market segment not previously identified: non-Big 6 specialization, which leads to production economies and the capture of market share through lower fees for a clientele seeking low-priced audits. These results also suggest that prior studies do not recognize sufficiently that Big 6 brand-name reputation is a necessary foundation on which to achieve higher priced quality-differentiated audits based on industry specialization.

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.

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.

scholarly journals The effect of auditor characteristics on tax avoidance of Iranian companies

2020 ◽  
Vol 27 (2) ◽  
pp. 119-134 ◽  
Author(s):  
Mahdi Salehi ◽  
Hossein Tarighi ◽  
Tahereh Alidoust Shahri
Keyword(s):  
Stock Exchange ◽  
Emerging Market ◽  
Tax Avoidance ◽  
Audit Fees ◽  
Industry Specialization ◽  
Content Type ◽  
Auditor Industry Specialization ◽  
Auditor Tenure ◽  
The Relationship ◽  
Auditor Characteristics

Purpose The purpose of this paper is to investigate the relationship between auditor characteristics and the level of tax avoidance in an emerging market. Design/methodology/approach In this regard, the effect of various factors such as auditor tenure, auditor industry specialization, audit reports and audit fees on tax avoidance was examined. The study sample includes listed companies in the Tehran Stock Exchange. The time period of study is six years from 2011 to 2016. Also in this study, firm size, leverage, firm age and auditor size were controlled. Findings The results of this research were determined in four hypotheses. First and second hypotheses that explore the relationship between auditor tenure and auditor industry specialization with tax avoidance were not confirmed. But the results showed a significant relationship between the type of audit opinions and audit fees with tax avoidance. Originality/value The current study investigates the auditor characteristics on tax avoidance in a developing nation of Iran and the results may helpful the developing countries.

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.

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.

Auditor industry specialization and audit fees surrounding Section 404 implementation

2014 ◽  
Vol 13 (4) ◽  
pp. 353-370
Author(s):  
Damon Fleming ◽  
Kevin Hee ◽  
Robin N. Romanus
Keyword(s):  
Cost Savings ◽  
Audit Fees ◽  
Least Square ◽  
Valuable Insight ◽  
Section 404 ◽  
Industry Specialization ◽  
Content Type ◽  
Current Accounting ◽  
Auditor Industry Specialization ◽  
Auditor Specialization

Purpose – The purpose of this paper is to investigate the association between auditor industry specialization and audit fees surrounding Section 404 implementation. Design/methodology/approach – With a sample of 1,006 industrial firms over the 2003-2005 reporting periods, an ordinary least square regression model was used to regress change in audit fees on auditor specialization measure and other control variables. Findings – It was found that auditor industry specialization is negatively related to the change in audit fees during the first year of Sarbanes–Oxley Act (SOX) compliance (2003-2004). It was also found that there were no significant cost savings associated with auditor industry specialization in the second year of SOX compliance (2004-2005). Practical implications – These results suggest that industry-specific expertise may enable auditors to adapt more efficiently to new significant audit standards and regulations, but that such efficiencies are likely to be most pronounced during the initial implementation year. Originality/value – Auditor competition and auditor specialization are at the forefront of today’s ever-changing accounting industry. Analysis of a contemporary auditing issue (auditor specialization) in the context of major legislation (SOX) provides a research setting that gives both academics and practitioners valuable insight toward how future legislation can impact current accounting industry issues such as the increasing need to have more expertise.

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 Fees: Further Evidence

2007 ◽  
Vol 26 (1) ◽  
pp. 147-158 ◽  
Author(s):  
Hua-Wei Huang ◽  
Li-Lin Liu ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Survey Data ◽  
Bargaining Power ◽  
Audit Fees ◽  
Negative Association ◽  
Industry Specialization ◽  
Audit Market ◽  
Auditor Industry Specialization ◽  
Audit Fee ◽  
The U.S

Casterella, Francis, Lewis, and Walker (CFLW 2004) find, using survey data from 1993, that (1) there is a Big 6 industry specialization audit fee premium in the small client segment of the U.S. audit market, but (2) audit fees decrease for large companies as the client becomes increasingly large relative to an auditor's clientele. In this study, we first replicate and confirm the results of CFLW (2004), using audit fee data from SEC filings for fiscal 2000 and 2001. In the post-SOX period, we find that the results related to specialization continue to hold in fiscal 2004 but not in 2003—suggesting that 2003 is perhaps a unique year due to the flux in the audit market following the enactment of SOX. With respect to client bargaining power, our results in the post-SOX period differ from CFLW (2004) in that we observe a negative association between client bargaining power and audit fees for both the small and large client segments.

Auditor Industry Specialization, Service Bundling, and Partner Effects in a Mining-Dominated City

2014 ◽  
Vol 33 (3) ◽  
pp. 153-180 ◽  
Author(s):  
Andrew Ferguson ◽  
Gabriel Pündrich ◽  
Adrian Raftery
Keyword(s):  
Audit Fees ◽  
Development Stage ◽  
Industry Specialization ◽  
Strategic Pricing ◽  
Mining Town ◽  
Auditor Industry Specialization ◽  
Big 4 ◽  
Sensitivity Tests ◽  
Industry Leadership ◽  
The Impact

SUMMARY: This study examines auditor industry specialization effects in Perth, a remote mining town in Australia characterized by a large number of small, homogeneous firms. We consider the impact of leadership by the non-Big 4 auditor BDO Kendalls (BDO) for a sample of 371 mining development stage entities (MDSEs). After controlling for factors known to determine audit fees, we find no evidence of auditor industry leadership fee premiums accruing to BDO, a result robust to a range of sensitivity tests including the broadening of tests Australia-wide. However, when the dependent variable is redefined to the total “bundle” of services provided by the audit firm (including audit and non-audit fees), the industry leader is shown to earn a fee premium suggesting BDO uses audits as a conduit to supply higher-margin non-audit services. Our findings suggest that strategic pricing by industry leaders may not be confined to Big 4 firms.

Sign in / Sign up

Export Citation Format

Share Document