The purpose of this paper is to investigate the association between auditor industry specialization and audit fees surrounding Section 404 implementation.
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.
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).
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.
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.
The authors greatly appreciate the comments and suggestions of K. Raghunandan during the early stages of this paper. The Charles W. Lamden School of Accountancy at San Diego State University and Department of Accounting at Texas Tech provided financial support for this project.
Fleming, D., Hee, K. and N. Romanus, R. (2014), "Auditor industry specialization and audit fees surrounding Section 404 implementation", Review of Accounting and Finance, Vol. 13 No. 4, pp. 353-370. https://doi.org/10.1108/RAF-09-2013-0109
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