Auditor Specialization, Auditor Dominance and Audit Fees
Auditor Specialization, Auditor Dominance and Audit Fees

Author: Steven F. Cahan

Publisher:

Published: 2012

Total Pages:

ISBN-13:

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A report issued by the U.S. General Accounting Office (GAO) in 2003 identified auditors' industry expertise as a critical factor for firms choosing an auditor, and highlighted the rather extreme levels of auditor concentration in some industries. We posit that the investment opportunity set (IOS) plays a fundamental role in determining whether an industry is an attractive target for auditor specialization. When industry-specific IOS is high, specialist auditors make costly investments in industry-specific knowledge, allowing them to offer a differentiated product and to create entry barriers for other audit firms. When the IOS of firms within an industry is relatively homogeneous, auditors can transfer such knowledge across clients in the industry more easily, resulting in cost savings and scale economies. However, greater homogeneity of IOS in an industry can also increase a client's aversion to sharing an auditor with its competitors because of concerns about transfers of proprietary information, suggesting that industries with relatively homogeneous IOS are less likely to be dominated by a single auditor. We show that auditor concentration in an industry relates positively to both the level and homogeneity of IOS in the industry, while auditor dominance relates negatively to industry IOS homogeneity. Further, we examine the effects of industry IOS on audit pricing.

The Association Between Industry, Regional City Specialization and the Audit Fee Premium/discount
The Association Between Industry, Regional City Specialization and the Audit Fee Premium/discount

Author: Jasmine Sze Ting Kwong

Publisher:

Published: 2011

Total Pages: 239

ISBN-13:

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This study investigates the relationship between auditor specialization and the audit fee premium/discount in Hong Kong SAR, China. The study has three main hypotheses: 1) that there is an audit fee premium when an audit firm is an industry, regional city and/or regional city-industry specialist; 2) that the audit fee premium increases when a Big 4 audit firm is an industry, regional city and/or regional city-industry specialist; and 3) that the level of audit fees decreases when a non-Big 4 audit firm is an industry, regional city and/or regional city-industry specialist. Both the ranking and market share benchmark methods are used for defining specialists. Also, the two industry classification systems, HSIC and NAICS are tested. In addition, the number of auditees is used to define market share. The sample consists of more than 1,000 Hong Kong listed companies from 2004 to 2006. Examining auditor specialization across a three year period is a different approach from previous studies, which allows the study to show whether specialist premiums or discounts are stable over time. Results indicate that the three types of auditor specialization examined exist in Hong Kong SAR, China and they are reasonably stable across time. However mixed results are found across the three years in relation with the level of audit fees. The main results provide strong evidence of a fee premium for regional city specialization under various definitions in one year, but these significant results did not hold in the two subsequent years. Some evidence of an industry specialist fee premium is detected in 2004 and 2005 while a discount is found in 2006 under some definitions. Results indicate none of the three types of specialization consistently appears in every year to justify any fee premiums/discounts unless influenced by other economic conditions.

Non-Audit Service Fees and Audit Quality
Non-Audit Service Fees and Audit Quality

Author: Chee Yeow Lim

Publisher:

Published: 2013

Total Pages: 59

ISBN-13:

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Recent studies on whether the provision of non-audit services impairs audit quality document mixed results, depending on the proxy for auditor quality used. We posit that the effect of non-audit fees on audit quality is conditional on auditor industry specialization in that audit quality is less likely to be impaired in the case of industry specialist auditors providing non-audit services. Our premise is that industry specialist auditors are more likely to be concerned about reputation losses and litigation exposure, and to benefit from knowledge spillovers from the provision of non-audit services. We find some evidence that audit quality (as measured by increased propensity to issue going-concern opinion, increased propensity to miss analysts' forecasts, as well as higher earnings-response coefficients) is less likely to be reduced for firms that acquire non-audit services from industry specialist auditors compared to non-specialist auditors. Implications are discussed.

Audit Industry Specialization
Audit Industry Specialization

Author: Keith A. Houghton

Publisher:

Published: 2001

Total Pages: 34

ISBN-13:

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While auditing literature has investigated the main effect of auditor industry specialization on audit fees and planning decisions, the underlying processes explaining differential pricing between specialists and other auditors are largely unexplored. This study seeks to fill a portion of this gap by examining the interaction between auditor industry specialization and auditee risk. Using data derived from a sample of public sector audits, this study examines distinctions in how different auditors price risk. Building upon the differentiation between "premium" and "discount" specialists investigated in Houghton, Dolley, Jubb and Monroe (2000) and possibly found in DeFond, Francis and Wong (2000), the results of this study demonstrate that, in response to increased auditee risk, premium specialists price risk relatively less than other auditors. In contrast, discount specialists increase fees relatively more than other auditors. These results may reflect differences in the skill sets and work processes that underlie specialization for these two specialist sub-groups. The results are also consistent with increased competencies of premium specialist auditors in the audit of risky clients.

The Impact of Auditor Industry Specialization on the Retention and Growth of Audit Clients
The Impact of Auditor Industry Specialization on the Retention and Growth of Audit Clients

Author: Mohamed Samy Eldeeb

Publisher:

Published: 2019

Total Pages: 36

ISBN-13:

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The effect of the economic financial crisis worldwide has increased the need for auditors to provide a high quality services to their clients. An important element considered by clients for selecting their auditors is whether the audit firm has specialization in particular industry. Audit firm industry specialization provides clients with value for money services to help management achieve efficiency and effectiveness in their operations. Other benefits for audit firms may include increased market share, audit tenure, better financial reporting and less earnings management, audit quality with less restatements of financial information, appropriate audit fees, less exposure to litigation risk, less enforceable action by supervisory bodies and ability to compete in highly competitive environment. Specialization was also seen as critical for the survival of the auditing profession. This research analyzes the effects of audit firm industry specialization on the retention of the audit firm and growth in its business. Factors such as whether the firm is a big 4, with international affiliation, local firm, type of industry and growth were also studied for audit firm retention and growth. The sample studied includes the top 100 publicly held companies' annual reports in the Egyptian stock market during the period 2007-2011 which are analyzed to determine the audit firms' retention and growth. The results support that industry specialization has an important effect on the auditor's retention especially for industry where capital investment is significant such as building, construction, financial services and housing and real estate. Big 4 audit firms retained their clients due to their industry specialization and brand name. The findings provided evidence that good knowledge of accounting & auditing standards resulted in audit firms with international affiliation competing with big 4 for clients' retention & growth in business. The result also showed some evidence that the auditing profession in Egypt is dominated by the big 4 and the Central Audit Organization.

Auditor Industry Specialization and Evidence of Cost Efficiencies in Homogenous Industries
Auditor Industry Specialization and Evidence of Cost Efficiencies in Homogenous Industries

Author: Kenneth L. Bills

Publisher:

Published: 2015

Total Pages:

ISBN-13:

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This study examines the audit pricing effects when auditors specialize in industries conducive to transferable audit processes. Our results indicate that specialists charge incrementally lower audit fees in industries with homogenous operations and 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 our conclusion that the reduction in fees indicates cost efficiencies rather than lower quality audits. Our results are somewhat surprising given they suggest auditors pass along cost savings to the client in certain settings. However, 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 results indicate that certain industries lend themselves to specialization because auditors generate cost-based competitive advantages without compromising service quality.

The Economics of Audit Quality
The Economics of Audit Quality

Author: Benito Arrunada

Publisher: Springer Science & Business Media

Published: 2013-11-11

Total Pages: 203

ISBN-13: 1475767285

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This book focuses on market mechanisms which protect quality in the provision of audit services. The role of public regulation is thus situated in the context defmed by the presence of these safeguard mechanisms. The book aims to contribute to a better understanding of these market mechanisms, which helps in defining the con tent of rules and the function of regulatory bodies in facilitating and strengthening the protective operation of the market. An analysis at a more general level is provided in the three chapters making up Part 1. In the four chapters of Part 2, on the other hand, this analysis is applied to a particular problem to determine how those non-audit services often provided by auditors to their audit clients should be regulated. Finally, Chapter 8 contains a summary of the analysis and conclusions of the work. The conclusion with regard to non-audit services is that their provision generates beneficial effects in terms of costs, technical competence, professional judgment and competition and, moreover, need not prejudice auditor independence or the quality of these services. This as sessment leads, in the normative sphere, to recommending a legislative policy aimed at facilitating the development and use of safeguards provided by the free action of market forces. Regulation should thus aim to enable the parties-audit firms, self-regulatory bodies and audit clients-to discover through competitive market interaction both the most efficient mix of services and the corresponding quality safeguards, adjusting for the costs and benefits of each possibility.

Audit Fees, Auditor Choice and Stakeholder Influence
Audit Fees, Auditor Choice and Stakeholder Influence

Author: Arifur Khan

Publisher:

Published: 2015

Total Pages: 40

ISBN-13:

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Despite the dominance of family-owned publicly listed companies in developing economies, prior research has paid relatively little attention to this area, and the socio-economic context of these countries has been mostly ignored. This study contributes to the accounting literature by providing empirical evidence of the effects of family control and ownership on audit pricing and auditor choice in a developing economy context. Using 1,058 firm-year observations of publicly listed companies in Bangladesh, where family firms are the most dominant form of public companies, we determine that in comparison with non-family firms, our sample family firms pay significantly lower audit fees and tend to choose lower quality auditors. However, for export oriented industries, family firms seem to pay significantly higher audit fees and recruit better quality auditors compared to non-family firms, indicating stakeholder power. Collectively, our findings have important implications for audit markets in emerging economies in which the sustainability of family firms is crucial for overall economic development.

Auditor Size, Partner-specialization, and Private Company Audit Adjustments
Auditor Size, Partner-specialization, and Private Company Audit Adjustments

Author: Zachary T. Kowaleski

Publisher:

Published: 2018

Total Pages: 57

ISBN-13:

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This study examines whether auditor size and partner-specialization predict audit adjustments when privately-owned broker-dealers (BDs) change audit firms. Private company auditors have relatively low incentives to compete on quality because managers may select the auditor without involving an audit committee, and these audits present relatively lower reputation and litigation risks compared to public companies. Though I predict that larger firms will provide higher audit quality in this environment, it is unclear whether partner-specialists' will use their BD domain-knowledge to provide higher audit quality where the market does not demand it. Analyses reveal that BDs that change to a larger (smaller) auditor are more (less) likely to record material audit adjustments. BDs that change to a specialist partner, however, are less likely to record material audit adjustments; partners from BD audit firms with no issuer clients drive this effect. Using a subsample with available fee and hour data shows that the auditor size improvements to audit quality correspond with increases to fees and hours, but also incremental to hours. Conversely, partner-specialists employ fewer audit hours than non-specialists. Collectively, these results show that smaller firms, especially the partner-specialists within those firms, are willing to tolerate a higher risk of material misstatement than larger firms will accept when the demand for audit quality is low.

Auditor Industry Specialization and the Earnings Response Coefficient
Auditor Industry Specialization and the Earnings Response Coefficient

Author: Jagan Krishnan

Publisher:

Published: 2014

Total Pages:

ISBN-13:

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This study compares the earnings response coefficients of clients of industry specialist and non-specialist auditors. Prior work (e.g., DeAngelo 1981) has suggested that auditors offer different levels of audit quality, in response to client variations in the demand for different levels of audit quality (Watts and Zimmerman 1986). One component of the quality difference across auditors is industry specialization (Craswell et al. 1995). Empirical evidence on the effect of industry specialization on audit quality proxies such as audit fees, auditor litigation and compliance with accounting standards is mixed. This study examines the hypothesis that industry specialization leads to a better quality of audit by comparing the earnings response coefficients of clients audited by industry specialists with those of clients not audited by industry specialists. Teoh and Wong (1993) argue that audit quality is positively associated with the client's quality of earnings and therefore the earnings response coefficient (ERC), which is the responsiveness of the stock market to information about unexpected earnings. They present evidence that one measure of audit quality, auditors' brand-name (Big 6 or not), is positively associated with the ERC. This paper extends this argument by examining the effect of another facet of audit quality, auditor industry specialization, on the ERC. The results suggest that, after controlling for previously established correlates of the ERC, as well as industry affiliation, clients of industry specialist auditors have higher ERCs than clients of non-specialist auditors.