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Article
Publication date: 16 March 2012

Albert Nagy

The purpose of this paper is to examine the effects of auditor specialization, at both the partner and office levels, on audit quality within a developed market (the USA).

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1192

Abstract

Purpose

The purpose of this paper is to examine the effects of auditor specialization, at both the partner and office levels, on audit quality within a developed market (the USA).

Design/methodology/approach

This study exploits the environment created when several large accounting firms purchased select Andersen offices following the firm's demise in 2002. OLS regressions were estimated from a sample of companies that assumingly followed their Andersen partner to the purchased accounting firm to examine the association between abnormal discretionary accruals and auditor specialization at both the office and partner levels.

Findings

The descriptive statistics and regression results show a significant negative relation between audit partner specialization and abnormal accruals. Furthermore, the results suggest that partner level specialization has a greater effect on audit quality than that of office level specialization.

Originality/value

This study contributes to the literature by examining the effects of auditor specialization at both the office and partner levels on audit quality within a developed market. The results of this study should be of interest to academics, investors, and regulators and help them in their assessments of auditor quality.

Details

Managerial Auditing Journal, vol. 27 no. 3
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 25 September 2018

Karim Hegazy and Mohamed Hegazy

This 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…

Abstract

Purpose

This 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/approach

This 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.

Findings

The 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/value

This 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.

Details

Journal of Accounting & Organizational Change, vol. 14 no. 3
Type: Research Article
ISSN: 1832-5912

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Article
Publication date: 18 November 2013

Ali R. Almutairi

– The purpose of this paper is to examine the impact of institutional holdings and corporate debts on audit quality, proxied by auditor industry specialization.

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1359

Abstract

Purpose

The purpose of this paper is to examine the impact of institutional holdings and corporate debts on audit quality, proxied by auditor industry specialization.

Design/methodology/approach

The tests use regression analysis for a sample of 396 company-years from 2003 to 2008 and control for factors known to affect auditor industry specialization.

Findings

The results show a positive association between institutional ownership and auditor industry specialization. These results are consistent across most measures of auditor industry specialization and different thresholds of audit firm market share. In addition, a positive link is reported between corporate debt and industry specialization by auditors. This result, however, holds under the composite proxy in terms of total assets only.

Research limitations/implications

The major limitation is the unavailability of data on audit fees and sales (revenues) to measure auditor market share.

Practical implications

Institutional investors and debtholders have preference for auditors who can enhance the credibility of financial reporting and improve the quality of financial information and the results document that the choice of specialist auditors can potentially influence this objective.

Originality/value

The paper provides information to academics, regulators, companies, and auditors concerning the impact of institutional investors and creditors on the choice of industry specialists. Also, it shows the importance of industry specialization on audit quality.

Details

Journal of Economic and Administrative Sciences, vol. 29 no. 2
Type: Research Article
ISSN: 1026-4116

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Article
Publication date: 4 November 2014

Damon Fleming, Kevin Hee and Robin N. Romanus

– The purpose of this paper is to investigate the association between auditor industry specialization and audit fees surrounding Section 404 implementation.

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2963

Abstract

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.

Details

Review of Accounting and Finance, vol. 13 no. 4
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 27 May 2014

Mai Dao and Trung Pham

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…

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8767

Abstract

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.

Details

Managerial Auditing Journal, vol. 29 no. 6
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 June 2004

Joseph V. Carcello and Albert L. Nagy

This study examines the effect that client size has on the relation between industry‐specialist auditors and fraudulent financial reporting. Most of the major accounting…

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7646

Abstract

This study examines the effect that client size has on the relation between industry‐specialist auditors and fraudulent financial reporting. Most of the major accounting firms have organized their audit practices along industry lines, reflecting a belief that industry specialization leads to higher quality audits. Furthermore, regulatory bodies and extant research suggests that larger clients have greater bargaining power and are more likely to be able to convince the auditor to acquiesce to aggressive accounting. Also, it may be more difficult for an auditor to possess industry expertise for larger clients who are likely to be more complex and operate in more than one industry. Consistent with previous research, we generally find a significant negative relation between auditor industry specialization and client financial fraud. Also, as expected, the negative relation between auditor industry specialization and financial fraud is weaker for larger clients. This study provides evidence that the positive benefits of auditor industry specialization in deterring financial fraud is affected by client size.

Details

Managerial Auditing Journal, vol. 19 no. 5
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 24 July 2009

Ali R. Almutairi, Kimberly A. Dunn and Terrance Skantz

The purpose of this paper is to examine the relation between a company's bid‐ask spread, a proxy for information asymmetry, and auditor tenure and specialization.

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3955

Abstract

Purpose

The purpose of this paper is to examine the relation between a company's bid‐ask spread, a proxy for information asymmetry, and auditor tenure and specialization.

Design/methodology/approach

The tests use clustered regression for a sample of 31,689 company‐years from 1992 to 2001 and control for factors known to impact bid‐ask spread in cross‐section.

Findings

The findings suggest that the market's perception of disclosure quality is higher and private information search opportunities are fewer for companies engaging industry specialist auditors. In addition, the paper finds that information asymmetry has a U‐shaped relation to auditor tenure. This U‐shaped relation holds for both specialists and non‐specialists; however, the bid‐ask spread for specialists tends to fall below that of non‐specialists at all tenure intervals.

Research limitations/implications

The findings may directly result from auditor tenure and specialization or it may be that those auditor‐related characteristics are a subset of concurrent choices made by the company that impacts disclosure quality.

Practical implications

Companies have incentives to lower information asymmetry and the findings document that the choice of a specialist auditor and the length of the auditor relationship can potentially influence this objective.

Originality/value

The paper provides information to academics, regulators, companies, and auditors concerning the effect of auditor‐client relationships on the level of information asymmetry. In addition, it shows the importance of industry specialization and audit firm tenure on audit quality.

Details

Managerial Auditing Journal, vol. 24 no. 7
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 25 October 2021

Emiliano Ruiz-Barbadillo and Jennifer Martínez-Ferrero

Sustainability assurance services are carried out in a competitive market where a wide range of assurance providers operate without the need for any specific professional…

Abstract

Purpose

Sustainability assurance services are carried out in a competitive market where a wide range of assurance providers operate without the need for any specific professional qualifications, competencies or skills. Assurance providers have heterogeneous professional backgrounds and experiences that lead to substantial diversity in sustainability assurance quality levels. This paper aims to provide an understanding of sustainability assurance quality. From a legitimacy perspective, the authors focus on the choice of assurance providers by exploring why a company voluntarily chooses an incumbent financial auditor to jointly provide audit and sustainability assurance services. The authors argue that to avoid the legitimacy threats undermining stakeholders’ confidence in the sustainability information disclosed, companies should only choose their incumbent financial auditors to provide sustainability assurance services when these auditors possess the professional attributes associated with sustainability assurance quality.

Design/methodology/approach

This study develops regression models for an international sample for 2007–2016, where the authors analyze why a company voluntarily chooses an incumbent auditor to jointly provide audit and sustainability assurance services from a legitimacy theory perspective.

Findings

Evidence confirms that the choice of incumbent auditors as assurance providers is more likely when these providers are more specialized in the industry. The authors also find that independence does not play a significant role in this decision. Therefore, an assurance provider’s industry specialization can be understood as an attribute that is associated with sustainability assurance quality and one which limits the legitimacy threats caused by a lack of sufficient sustainability knowledge.

Practical implications

Given that companies have complete freedom when choosing their assurance providers, the selection of a high-quality incumbent auditor is an indirect measure of social commitment and a mechanism to improve public trust. The results confirm that it is fundamental for firms to understand the situations when choosing an incumbent financial auditor to provide sustainability assurance services is the best way to ensure firm legitimacy while obtaining higher sustainability assurance quality due to the spillover effect. This paper provides useful evidence for firms and managers who can become aware that the legitimacy threat associated with the auditing profession’s questionable competence to conduct efficient sustainability assurance engagements can be reduced if they hire an incumbent financial auditor with greater industry specialization. For assurance providers, the results are especially useful, as they should know that companies will be more likely to choose their incumbent financial auditor when that auditor possesses certain professional attributes, like industry specialization. The ability to assimilate and exploit the knowledge gained through auditing activities can be improved even more by specialization, which enhances sustainability assurance quality.

Social implications

From a social perspective, stakeholders perceive industry specialization as an indicator of the professional skills necessary to increase both the real and perceived quality of sustainability assurance services, thereby limiting the legitimacy threat arising from a lack of sustainability knowledge. The evidence also provides valuable results for regulatory bodies, as it shows that firms are not able to address the legitimacy gap caused by stakeholders’ perceptions that incumbent financial auditors can easily be controlled by companies. Thus, doubts arise as to whether this joint provision undermines auditor independence. Precisely, these doubts about assurance provider independence can erode public confidence in assurance and devalue the quality of the service. The results of this paper highlight the need to strengthen regulation on sustainability reporting and assurance. The advances and relevance of sustainable development in recent years and in future agendas require a firm commitment to sustainability reporting and assurance of quality, reliability, integrity and confidence.

Originality/value

First, this study contributes to recent empirical studies that focus on the role of sustainability assurance services in the legitimation process of corporate sustainability reporting. However, while that research analyzes how the legitimacy theory explains the voluntary adoption of sustainability assurance, this paper adds to the literature by presenting evidence about why certain incumbent auditors are appointed to carry out sustainability assurance services. Second, this paper contributes to the sustainability assurance quality literature. Third, unlike previous studies that have regressed various client-specific and institutional factors that influence firms’ decisions to choose assurance providers, this study contributes to the research by providing knowledge about a set of professional features that may explain the decision model of assurance providers selection from a legitimacy perspective.

Details

Sustainability Accounting, Management and Policy Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2040-8021

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Article
Publication date: 1 March 2006

Sumithira Thavapalan, Robyn Moroney and Roger Simnett

This paper investigates the impact of the PricewaterhouseCoopers (PwC) merger in Australia on existing and potential clients of the new merged firm. From prior theory it…

Abstract

This paper investigates the impact of the PricewaterhouseCoopers (PwC) merger in Australia on existing and potential clients of the new merged firm. From prior theory it is expected that some existing clients may have an incentive to switch away from a newly merged firm as the same larger firm now audits close competitors once audited by separate firms. Prior theory also suggests that another group of potential clients should be attracted to the newly merged firm where the merger enhances or creates industry specializations. The expectation is that in both of these instances there will be increased switching activity associated with the newly merged audit firm. Contrary to expectations, a significantly lower level of switching behaviour was observed for the newly merged firm compared with that of the other Big 5 firms, suggesting that an advantage of enhanced specialization may not be the attraction of new clients but the retention of existing clients. When comparing the nature of the switches, some support was found for the view that the switches to the new firm were likely to be in enhanced areas of specialization, but no evidence was found to suggest that close competitors would switch away from this firm. The greater rate of retention of clients compared with other Big 5 firms was not associated with a more competitive audit pricing policy.

Details

Pacific Accounting Review, vol. 18 no. 1
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 30 August 2013

Winifred D. Scott and Willie E. Gist

The purpose of this study is to explore the effect of industry specialization on the absorption and competitive pricing (or lack thereof) of audits of large Andersen…

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8064

Abstract

Purpose

The purpose of this study is to explore the effect of industry specialization on the absorption and competitive pricing (or lack thereof) of audits of large Andersen clients (S&P 1500 companies) who switched to the remaining Big 4 international accounting firms in 2002 due to the demise of Arthur Andersen LLP (Andersen). Did the audit clients pay a premium or discount in audit fees to their new auditor who specialized in their industry?

Design/methodology/approach

Ordinary least squares regression is used to test hypothesis of a positive association between industry specialization and audit fees charged to former Andersen's audit clients in 2002 following Andersen's demise. This study provides more control over size effects by design. Test variables are constructed based on national market share of audit fees within an industry. Logistic regression is used to examine the likelihood of choosing new auditor that is an industry specialist.

Findings

Results support hypothesis, consistent with auditor differentiation explanation. Proportion of clients that had engaged an industry specialist in 2001 increased from 38 percent (84 clients) to 48 percent (105 clients) in 2002. No evidence of price‐gouging in 2002 although clients who aligned with industry specialist paid a 23.2 percent premium in audit fees. Large clients lost bargaining power to negotiate lower fees. Findings are robust to the inclusion of additional alternative measures of company size.

Research limitations/implications

Results of logistic regression analysis imply that large audit clients with former auditor of tarnished reputation, long auditor tenure and high leverage are more likely to switch to an industry specialist to possibly signal audit/financial reporting quality. Large sample companies may limit the ability to generalize findings to smaller companies.

Practical implications

Mandatory audit firm rotation (currently being debated in the profession) will have costly effect on the pricing of Big 4 audits for companies wanting to signal audit and financial reporting quality to affect market perception, and large companies would likely lose their ability to bargain for lower audit fees.

Originality/value

The paper focus on the alignment of Andersen clients and impact on audit fees with Big 4 industry specialists resulting from the sudden increase in audit market concentration. Prior to Andersen's collapse, evidence on the association of audit fees premium and industry specialists was mixed, and little attention has been given to the influence of auditor industry specialization on both audit fees and alignment of former Andersen clients with a Big 4 specialist. This paper fills that void.

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