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Article
Publication date: 1 February 2004

Mohd Mohid Rahmat and Takiah Mohd Iskandar

This study examines audit fee premiums from brand name, industry specialization, and industry leadership after the merger of two Big 6 audit firms, creating the Big 5 in 1998 in…

Abstract

This study examines audit fee premiums from brand name, industry specialization, and industry leadership after the merger of two Big 6 audit firms, creating the Big 5 in 1998 in the Malaysian audit market. A sample of 679 companies listed at the main and second boards of Kuala Lumpur Stock Exchange (KLSE) are investigated for audit fee premiums. Industry specialization is determined on the basis of 20 per cent share of audit market calculated by the number of audited companies in the industry. Audit fee premiums are calculated based on the Simunic (1980) model of audit fees. Results show: that Big 5 audit firms obtain 65.4 per cent audit market share for all KLSE listed companies; that Big 5 audit firms earn higher audit fees than non‐Big 5; and that industry specialization does not generate audit fee premiums. The study finds evidence for audit fee premiums derived from industry market leadership. Results also reflect the competitiveness among Big 5 audit firms in the audit market especially following the merger of Big 6 audit firms.

Details

Asian Review of Accounting, vol. 12 no. 2
Type: Research Article
ISSN: 1321-7348

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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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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: 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 firm is…

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: 16 May 2008

M. Kend

The purpose of this paper is to consider the supply of audit firm industry specialisation in the market for statutory audits of publicly traded companies in Australia. The purpose…

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Abstract

Purpose

The purpose of this paper is to consider the supply of audit firm industry specialisation in the market for statutory audits of publicly traded companies in Australia. The purpose of this study is to seek to gain a better understanding of the dynamics within the market for industry specialist audit services.

Design/methodology/approach

A structured interview process is used to investigate certain issues with the suppliers of industry specialist audit services (in this case all the then Big 5).

Findings

This paper found that industry specialisation involves the Big 5 audit firms developing a specialised knowledge of what clients do within any given industry and the issues and audit risks they face. The Big 5 have industry “focus” groups that are responsible for providing “leading edge” practices to their clients. According to many of the auditor interview respondents, the large number of Australian Stock Exchange (ASX) classifications has meant that audit firms have sought a more manageable means of partitioning their practices into different industry focus groups. The ASX classifications were described by some of those interviewed as being irrelevant. This raises questions regarding prior auditor industry specialisation research that has relied on these classifications.

Research limitations/implications

The study does suffer from two limitations. First, the research only questioned the Big 5 firms, despite evidence that non‐Big 5 firms can create specialisations. Second, the study's data is relatively dated being collected in the late 1990s, so there is a possibility the findings may now be out of date, particularly given as indicated before, specialisation premiums are not generalisable across time.

Originality/value

The paper demonstrates the criticality of the relationship between audit market participants in developing an underlying framework that can universally explain the interactions that occur in the market for specialised audits.

Details

Pacific Accounting Review, vol. 20 no. 1
Type: Research Article
ISSN: 0114-0582

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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 between audit…

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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: 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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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

Keywords

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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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

Keywords

Article
Publication date: 7 August 2018

Belen Fernandez-Feijoo, Silvia Romero and Silvia Ruiz Blanco

This paper uses institutional theory to analyze the structure of the sustainability assurance market (SAM) at a global level. The purpose of this paper is to determine if regional…

Abstract

Purpose

This paper uses institutional theory to analyze the structure of the sustainability assurance market (SAM) at a global level. The purpose of this paper is to determine if regional differences affect industry specialization in this market.

Design/methodology/approach

Using a sample of 3,657 sustainability reports (SRs) with assurance statements, the authors study the global and regional specialization of assurers by breaking down the sample into three main regions. The authors approach industry specialization using previous methodologies applied to the financial audit market, and explain differences statistically significant among regions.

Findings

The authors find different industry specialists depending on the geographical region in which the audit firm is located. The Europe, Middle Eastern and Africa region has the highest number of industry specialists and the Asia-Pacific region the lowest. Notwithstanding the global participation of Big 4 firms, assurance specialization depends on the country where the company is located.

Research limitations/implications

The paper reveals the need to include regional differences in the analysis of the SAM at the international level.

Practical implications

The study shows an in-depth study of the SAM that may be useful for assurers, to decide strategic actions in industries and countries and for regulators, to control the risk of monopolistic/oligopolistic markets.

Originality/value

The study presents a novel approach to the analysis of the assurance market for SRs, by studying it from the supply point of view. The analysis provides a measure of specialization that may help understand the structure of the SAM.

Details

Management Decision, vol. 57 no. 3
Type: Research Article
ISSN: 0025-1747

Keywords

Article
Publication date: 1 February 1991

Robert C. Hine

International specialisation in production via thedevelopment of international trade and factormovements is the basis of much of the developedworld′s prosperity. This article is…

Abstract

International specialisation in production via the development of international trade and factor movements is the basis of much of the developed world′s prosperity. This article is concerned with the forces that drive specialisation in manufacturing in the developed countries, and particularly the role played by regional economic integration in the European Community. A distinction is drawn between specialisation that takes place within (intra) and between (inter) industries with emphasis here on the latter. Specifically, the analysis seeks to explain differences in the sectoral composition of industry between pairs of countries using regression analysis. Factor endowments, per capita incomes and country size are found to influence industrial similarity. Membership of the EC and participation in the EC‐EFTA free trade areas are associated with increased inter‐industry specialisation. Movement towards a European Economic Space could accentuate this phenomenon, with important adjustment implications.

Details

International Journal of Manpower, vol. 12 no. 2
Type: Research Article
ISSN: 0143-7720

Keywords

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…

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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. 13 no. 2
Type: Research Article
ISSN: 2040-8021

Keywords

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