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

2003 ◽  
Vol 22 (2) ◽  
pp. 33-52 ◽  
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.

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

Industry Specialization by Global Audit Firm Networks

2009 ◽  
Vol 84 (2) ◽  
pp. 355-382 ◽  
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.

Audit tenure, auditor specialization and audit report lag

2014 ◽  
Vol 29 (6) ◽  
pp. 490-512 ◽  
Author(s):  
Mai Dao ◽  
Trung Pham
Keyword(s):  
National Level ◽  
Positive Association ◽  
Early Years ◽  
Audit Report ◽  
Industry Specialization ◽  
Content Type ◽  
Audit Firm ◽  
Differentiation Strategy ◽  
Auditor Industry Specialization ◽  
The Impact

Purpose – This paper aims to examine the association between audit firm tenure and audit report lag (ARL) and the impact of auditor industry specialization on the association between audit firm tenure and ARL. Design/Methodology/Approach – Using Habib and Bhuiyan’s (2011) method of measuring auditor industry specialization, the authors examine the sample of 7,291 firm-year observations from 2008 to 2010. Findings – The authors find that auditor industry specialization (regardless of city-level, national-level and joint city- and national-level industry specialization) weakens the positive association between ARL and short audit firm tenure, suggesting that auditor industry specialization complements the negative effect of short audit firm tenure on ARL. Originality/value – First, the authors add to the literature by answering the question of whether hiring industry auditor specialists is an effective way to shorten ARL created by short audit tenure. The authors provide some evidence that the concern of short audit tenure leading to longer ARL is reduced by hiring an industry-specialized auditor. Prior research mainly focuses on identifying the determinants of ARL without going further to find out which are the effective ways to reduce the audit delay. Second, their findings can somehow resolve the debate on whether audit firm rotation should be mandatory. A new auditor’s lack of knowledge of clients’ business operations during the early years of audit engagements results in longer ARL, which eventually influences the clients’ financial performance. The authors' result suggests the firms can reduce this adverse consequence by hiring an industry-specialized auditor. Finally, their findings may provide helpful information to firms in selecting external auditors, public accounting firms in selecting a differentiation strategy and regulators in mandating audit firm rotation.

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

2015 ◽  
Vol 35 (1) ◽  
pp. 23-45 ◽  
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.

The impact of non-timely 10-Q filings and audit firm size on audit fees

2018 ◽  
Vol 33 (5) ◽  
pp. 503-516 ◽  
Author(s):  
Tiffany Chiu ◽  
Feiqi Huang ◽  
Yue Liu ◽  
Miklos A. Vasarhelyi
Keyword(s):  
Regression Model ◽  
Firm Size ◽  
Audit Fees ◽  
Audit Risk ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact

Purpose Prior studies suggest that non-timely 10-Q filings indicate higher potential risks than non-timely 10-K filings. Furthermore, larger audit firms tend to be more risk-averse and conservative about reporting. Inspired by these research streams, this paper aims to investigate the influence of non-timely 10-Q filings on audit fees and the impact of audit firm size on this association. Design/methodology/approach The cross-sectional audit fee regression model used in this study is similar to that used in prior audit fee research (Simunic, 1980; Francis et al., 2005; Hay et al., 2006; Wang et al., 2013). The model includes the following five major characteristics that would influence auditors’ fee decisions: auditee size (LNAT), complexity (REIVAT, FOREIGN, SEG), financial condition (LOSS, ROA, GROWTH, ZSCORE), special events (ICW, RESTATE, INITIAL, GC) and auditor type (BIG4). To examine the effect of non-timely 10-Q filings on audit fees, the variable NT10Q is included in the audit fee model. Findings The results indicate that when both non-timely 10-K and non-timely 10-Q filings are included in the regression model, only non-timely 10-Q filings are significantly associated with higher audit fees, suggesting that the presence of non-timely 10-Q filings signals more serious underlying problem than non-timely 10-K filings in the audit fees decision processes. In addition, we find that audit fees for firms audited by Big 4 auditors are 26.4 per cent higher when those firms file non-timely 10-Q reports, whereas there is no significant association between non-timely 10-Q filings and audit fees for firms audited by non-Big 4 auditors. Practical implications As no attention has been paid to the investigation of the impact of non-timely 10-Q filings on audit fees, with the aim of filling the gap of this specific research area, this study examines the association between non-timely 10-Q filings and audit fees and the influence of audit firm size on this association. Originality/value The contribution of this paper is threefold: first, it is the first study to examine the association between non-timely 10-Q filings and audit fees. The results show that non-timely 10-Q filings are a better and earlier indicator of audit risk than non-timely 10-K filings. Second, the results reveal that the relationship between non-timely 10-Q filings and audit fees is affected by audit firm size. Specifically, Big 4 auditors tend to charge higher audit fees in the presence of non-timely 10-Q filings, reflecting that they are more sensitive to audit risk than smaller audit firms are. Third, an examination of the quarterly effect of non-timely 10-Q filings on audit fees indicates a stronger effect from the first quarter’s non-timely 10-Q filings, compared to the second or third quarter.

The Impact of the Big 4 Consolidation on Audit Market Share Equality

2011 ◽  
Vol 30 (1) ◽  
pp. 49-73 ◽  
Author(s):  
Kimberly Dunn ◽  
Mark Kohlbeck ◽  
Brian W. Mayhew
Keyword(s):  
Market Share ◽  
Market Concentration ◽  
Levels Of Analysis ◽  
Big 5 ◽  
Audit Firm ◽  
Audit Market ◽  
Big 4 ◽  
Market Shares ◽  
The Impact ◽  
The City

SUMMARY: We investigate the Big 5 to Big 4 consolidation and its impact on audit market share equality. We extend the GAO’s (2008) study on audit firm industry market concentration to examine whether the remaining Big N firms’ market shares are more equal after the Big 4 consolidation. We also extend the GAO study to examine audit market shares at the city and city-industry levels. We find that while overall market concentration increases, the Big 4 have more equal market shares than the Big 5 had prior to the consolidation at all levels of analysis. The increase in market share equality may explain why there has been inconsistent evidence of an association between market concentration and competition after the consolidation (Feldman 2006; GAO 2008). However, we find that the largest four clients in each market we examine are more likely to share the same auditor after consolidation, which suggests the largest clients face constrained choices.

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

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

Industry Specialization by Auditors

1999 ◽  
Vol 18 (1) ◽  
pp. 1-17 ◽  
Author(s):  
Chris E. Hogan ◽  
Debra C. Jeter
Keyword(s):  
High Risk ◽  
Market Share ◽  
Scale Economies ◽  
The Other ◽  
Industry Specialization ◽  
Audit Market ◽  
Audit Firms ◽  
Regulated Industries ◽  
Concentration Levels ◽  
Over Time

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.

Audit firms and industry specialization in an emerging economy

2018 ◽  
Vol 14 (3) ◽  
pp. 338-362
Author(s):  
Karim Hegazy ◽  
Mohamed Hegazy
Keyword(s):  
Financial Services ◽  
Capital Investment ◽  
Emerging Economy ◽  
Annual Reports ◽  
Brand Name ◽  
Industry Specialization ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms

PurposeThis study aims to investigate the implications of audit industry specialization on auditor’s retention and growth within an emerging economy. Factors such as whether the firm is a Big 4, a firm with international affiliation, a local firm and the type of industry were studied to analyse the reasons behind audit firm retention and growth.Design/methodology/approachThis research is based on a field study related to audit firms providing services to listed companies in an emerging economy. The sample includes the top 100 publicly held companies’ in the Egyptian stock market during 2006-2011 for which their annual reports are analysed to determine the audit firms’ retention and growth. An assessment of the continuity of the auditors and the increase in the number of audit clients were also measured.FindingsThe results confirm that industry specialization has an important effect on the auditor’s retention, especially for industries where capital investment is significant such as buildings, construction, financial services, housing and real estate. Big 4 audit firms retained their clients because of their industry specialization and brand name. Evidence was found that good knowledge of accounting and auditing standards resulted in audit firms with international affiliation competing with the Big 4 for clients’ retention and growth.Originality/valueThis study contributes to the existing literature, as it is among the first to provide empirical evidence on auditor retention, growth and auditor’s dominance in an emerging economy such as Egypt.

A New Approach to Estimating the Relation between Audit Fees and Financial Misconduct

2019 ◽  
Vol 34 (2) ◽  
pp. 41-61 ◽  
Author(s):  
Bidisha Chakrabarty ◽  
Scott Duellman ◽  
Michael A. Hyman
Keyword(s):  
Selection Bias ◽  
Audit Fees ◽  
Governance Structure ◽  
Small Sample ◽  
New Approach ◽  
Audit Firm ◽  
Public Firms ◽  
Financial Misconduct ◽  
Systematic Selection ◽  
The Impact

SYNOPSIS Research on the association between abnormal audit fees (measuring audit effort) and financial misconduct has produced mixed results. The use of actual misstatements in this research creates small-sample inferences, introduces systematic selection bias, and reduces the scope of sample coverage. In this study we use a metric based on Benford's Law to analyze the impact of abnormal audit fees on the likelihood of misconduct. This measure is parsimonious, avoids selection bias, and can be computed for a large sample of public firms. Consistent with theory, we find that greater audit effort reduces the likelihood of misconduct and auditor resignations are more likely for clients with higher misconduct likelihood. Our findings are not driven by audit firm size, client size, the governance structure of the client, or economic bonding explanations. The effect is not subsumed when controlling for alternative misconduct measurement metrics and is robust across multiple tests to address endogeneity. JEL Classifications: G32; M41.

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