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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?

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.

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.

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.

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.

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.

The purpose of this paper is to examine the relationship between the intensity of accruals and auditor industry specialization. It investigates whether a client firm’s accruals intensity is a factor associated with the firm being audited by an industry specialist auditor.

This paper employs an empirical archival methodology using publicly available data. The sample consists of client firms that switched auditors from 2004 to 2014.

The results show that accruals intensity is positively associated with the choice of an industry specialist auditor, measured both at the national and the city levels. These findings imply that companies with high levels of accruals choose an industry specialist auditor to signal the quality of their accruals and to gain more credibility for their financial reporting.

This paper provides original empirical evidence of the association between accruals intensity and the choice of an industry specialist auditor. This link is new to the literature. Extant literature shows that firms with high levels of accruals are regarded as risky and suffer from reduced credibility in financial markets. This study contributes to the literature by showing that these firms choose an industry specialist auditor to alleviate investors’ credibility concerns about the high levels of accruals. These findings provide insightful information to audit firms, to managers of firms that inherently display high levels of accruals and to the capital markets participants in general.

The purpose of this study is to examine the association between auditor industry specialization and accounting quality in the European Union (EU).

This study employs a difference-in-differences design and explores audit quality from different industry specialist perspectives and different accounting standard regimes. Specifically, this study examines accounting quality among audits performed by non-industry specialists, EU member country-level industry specialists (EUM-level), EU community-level industry specialists (EUC-level), as well as joint industry specialists.

This study finds evidence of an improvement in accounting quality among audits performed by non-industry specialists post-IFRS. There is also evidence of an improvement in accounting quality among audits performed by EUC-level industry specialists post-IFRS. In addition, accounting quality among audits performed by EUM-level industry specialists seems to be greater than that of audits performed by non-industry specialists in either the pre-IFRS period or the post-IFRS period. Overall, the mandatory adoption of IFRS in the EU appears to be associated with an improvement in accounting quality among some auditor groups.

Industry specialization and accounting quality are not directly observable constructs; this study inevitably employs proxy measures for both. The findings of this study are location-specific and apply to mandatory IFRS adopters only.

This study informs regulators with respect to the importance of industry specialist auditors and financial reporting quality, particularly within the context of the EU. The findings suggest that industry specialists were a significant accounting quality determinant during the mandatory adoption of IFRS. The findings have implications for regulators in the EU and beyond.

This study is among the first to investigate the impact of auditor specialization on accounting quality in the EU, particularly in connection with the adoption of IFRS.

The extant literature has established that industry-specialist auditors gain performance-enhancing industry-specific sub-specialty knowledge (e.g., Solomon, Shields, & Whittington, 1999) via training and on the job experience. This knowledge has been shown to allow specialists to outperform non-specialists on a range of industry-specific tasks. The current study extends this line of research by comparing and contrasting the relative performance gains enjoyed by industry-specialist auditors in two different industry settings, one regulated and the other unregulated. When specializing in regulated industries, auditors gain very detailed industry-specific knowledge which is not the case for specialists in unregulated industries (Dunn & Mayhew, 2004). By comparing industry-specialists to non-specialists with matching industry-based experience, this study measures the relative benefits of specialization in different industry settings, rather than the benefits of specialization per se, which has been well established in the literature. This study finds that the performance gains made by regulated industry-specialists significantly outweigh those made by unregulated industry-specialists on industry-specific tasks. The implications of these results for future research and practice are explored in the body of the chapter.

This study aims to examine the relationship between the individual auditor’s industry specialization and the audit report lag (hereafter ARD). Further, it explores whether changing in the audit reporting requirement (i.e. the adoption of ISA701) influences the auditor’s industry specialization effect on the ARD.

A large data set of companies listed on the NASDAQ OMX Stockholm over the period 2010–2019 has been analyzed. Least squares regressions have been estimated to provide empirical evidence for the researched hypotheses.

The research findings indicate that the ARD is shorter for client firms audited by an industry specialist audit partner. Testing for the moderating role of changing in the auditing reporting regulation on the relation between the audit partner’s industry specialization and the ARD, the authors reveal that all client firms (except client firms with industry specialist audit partners) experienced an increase in the ARD. Overall, the baseline regression findings are found to be robust to the endogenous auditor choice and multiple measures of both the ARD and the auditor’s industry specialization.

This paper provides novel evidence on the relationship between the audit reporting lag and industry specialization from the individual auditor perspective, an issue that has hitherto been unexplored. The regression results further contribute to the upsurge debate about the consequences of changing in the audit reporting model by providing consistent support for the importance of industry specialization of the audit partner in minimizing costs derived from the former requirement.

This study investigates how the timeliness of financial reporting by listed companies in the United Arab Emirates (UAE) is influenced by the interaction effect between industry-specialist auditors and board governance.

The Emirati capital markets – the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM) – were used to obtain the data, which covered the seven-year period between 2011 and 2017. In total, 385 observations were obtained. Descriptive statistics and multiple regression were the principal statistical tests employed using the panel data method.

The results of the direct effect tests reveal that board independence and industry-specialist auditors have no significant influence on financial reporting timeliness. Nevertheless, the results also show that the timeliness of financial reporting by listed companies in the UAE is influenced by the interaction effect between auditors' industry specialisation and the governance of firm boards. More specifically, the results reveal that financial reporting timeliness is positively associated with board independence for companies audited by industry-specialist auditors. This finding is consistent with the notion that industry-specialist auditors complement the role of effective board governance.

This study only focuses on secondary data from non-financial companies listed in the UAE markets. Therefore, the outcomes may not be generalisable to sectors related to finance. Future researchers are recommended to examine financial sectors and apply alternative measurements such as surveys or interviews with directorial boards and external auditors. Furthermore, this study used only one measure of industry-specialist auditors, while board governance was limited to board independence. Future studies could utilise different measurements for industry-specialist auditors and more board governance measures to obtain more robust findings.

The evidence provided indicates that when a company listed in the UAE has a high-quality board, it benefits by engaging auditors who specialise in the industry in terms of improving the timeliness of financial reporting. The findings also indicate the need for closer monitoring of management to safeguard their reputation. This might attract the attention of the Big Four audit firms and industry–specialist auditors to continuously re-evaluate their audit work, professional training and staff skills, while they might also try to differentiate their performance and monitoring capabilities from the non-Big Four audit firms and non-industry specialist auditors.

The main contribution of this study to the overall body of research is the concept that having independent directors is associated with improved reporting timeliness because financial reports are monitored with greater efficiency by industry–specialist auditors. This study provides evidence for the interaction effect between internal and external governance mechanisms on financial reporting quality, which has not been the focus of prior studies on financial reporting quality.

This paper aims to examine the effect of executive compensation incentives, specifically CEO inside debt holdings, on the choice of industry specialist auditor.

High inside debt holdings are expected to constrain excessive managerial risk-taking and align the interests of managers and outside debtholders. The authors hypothesize that reduced debtholders’ expropriation concerns will decrease the demand for high audit quality, measured by industry specialization. The authors investigate a sample of US firms from 2006 to 2018 using OLS regression and use CEO relative leverage to proxy for CEO inside debt holdings. The authors conduct an additional two-stage least squares regression analysis to address potential endogeneity issues.

The paper finds that firms with higher levels of CEO inside debt tend not to appoint an auditor with industry specialization. This result is consistent with the notion that inside debt mitigates agency conflicts between managers and debtholders, reducing the demand for high-quality audits as a monitoring mechanism. The paper also finds that among firms which are excessively leveraged, those with higher levels of CEO inside debt tend to appoint an industry specialist auditor.

The findings contribute to the literature on agency cost and auditor choice by demonstrating that CEO inside debt has both substitutive and complementary effects on demand for industry specialist auditors.

This study aims to examine the association between non-audit fees and audit quality by using the context of gender-diverse audit committees. Further, the authors assess whether this link is moderated by industry-specialist auditors.

This study used non-financial FTSE-350 firms over the period of seven years. In addition, the authors use ordinary least squares regression to test the research hypotheses.

The authors find that female directors on audit committees are negatively related to non-audit fees, suggesting that non-audit fees reduce audit quality. Moreover, the results indicate that industry-specialist auditors positively moderate the link between gender-diverse audit committees and non-audit fees. This suggests that non-audit fees improve audit quality when the auditor is an industry-specialist.

The study does not support blanket restrictions on non-audit fees. It recommends regulators to consider industry expertise of auditors when devising non-audit fee restrictions. Moreover, the findings of this study have implications for firms aiming to understand whether non-audit fees could be used for enhancing audit quality.

By using the context of female directors on audit committees, the authors conclusively assess the link between non-audit fees and audit quality. Further, this study provides a more robust evidence on whether industry-specialist auditors affect the relationship between non-audit fees and audit quality.

This paper aims to investigate the effect of auditor switching and lowballing on conditional conservatism, particularly how different types of auditor switching, namely, upward, downward and lateral switching to/from Big 4 and industry specialists, affect earnings quality in the following selected Asian countries: Indonesia, Malaysia, the Philippines, South Korea and Thailand.

Using conditional conservatism as a proxy for earnings quality, this study hypothesises that upward switching from non-Big 4 to Big 4 auditors, or from non-specialist to specialist auditors, would result in high conditional conservatism, while downward switching would lead to low conditional conservatism. The study further tests whether lowballing provides a viable explanation for reduced earnings conservatism in firms that switch from Big 4 to non-Big 4 auditors, or from specialist to non-specialist auditors.

The analysis, on a sample of 28,073 firm-year observations from 2007 to 2016, shows that the decision to downgrade auditors leads to lower conditional conservatism in the year of switching, compared with other firms and the pre-switching year. The evidence further shows that, when firms downgrade their auditors, lowballing contributes to a decrease in conditional conservatism in the first year of audit switching. Further, this research finds that switching to specialist auditors will result in increased conditional conservatism, while switching from specialist auditors to non-specialist auditors will result in reduced conditional conservatism.

The findings of this study are useful to investors who are looking to diversify their investment portfolio in developing markets, as evidence about auditor switching and quality of financial reporting may be an important factor in their investment decisions. Downward auditor switches and lowballing could act as red flags to investors in the sense that these events could signal a decrease in conditional conservatism and, hence, quality of earnings.

This research offers new evidence to support the view that management decisions to switch to lower-quality auditors will force newly appointed auditors to acquiesce to clients’ demands for reporting low-quality earnings.

The purpose of this paper is to examine whether firms use different earnings management approaches when facing financial difficulties and the effects of industry-specialist auditors in constraining those choices. The empirical results suggest that (1) firms with lower risk of business failure but with stronger incentives to adjust earnings upward tend to use real earnings management (REM) income-increasing approaches while (2) at the same time, using discretionary accruals for income-decreasing earnings management, due to constraints imposed by specialist auditors on the use of accrual-based earnings management (AEM). This is consistent with the findings of Chi et al., and the authors do not find similar evidence for the firms with higher risk of failure. Also, (3) regardless of the level of failure risk, firms turn to REM while interestingly, such REM behavior is effectively curbed by industry-leading specialist auditors (specialist auditors with the highest client market share) on financially distressed firms. These results extend the findings of Chi et al. (2011), suggesting that industry-specialist auditors have different tolerance levels for earnings management approaches by firms with different levels of business failure risk. That is, when auditing clients with higher risk of failure, specialist auditors are more likely to maintain higher audit quality through more stringent audit testing and use of more audit staff time to prevent an occurrence of audit failure.

The authors examine earnings management behavior across firms in Taiwan with different levels of business failure risk and the effects of audit partner industry specialization in constraining that behavior. Chi et al. (2011) studied low-risk firms with incentives to adjust earnings upward and found firms use REM when the auditors constrain AEM. The authors extend the work of Chi et al. and observe firms with different levels of failure risk.

The authors find (1) lower risk firms may use discretionary accruals to adjust earnings downward while the authors find no similar evidence for financially distressed firms, (2) lower risk firms may use REM when their industry-specialist auditors curb AEM and (3) the industry leaders among specialist auditors do the same for the financially distressed firms. The results demonstrate the extent to which industry-specialist auditors apply different tolerance levels for earnings management behaviors across firms with different levels of failure risk.

The study contributes to the literature in the following three ways: first, the authors fill a gap in the existing literature by comparing firms with higher risk of business failure to firms with lower risk of business failure to explore the possible difference in the two different kinds of earnings management behavior; second, the authors extend the findings of Chi et al. (2011) and examine whether specialist auditors, when auditing firms with higher risk of business failure, will input more audit effort to constrain their clients' use of REM and third, since business failures have a significant impact on the capital markets and any associated audit failures can have an even greater negative impact on investor confidence, the study provides information useful to auditors and regulators in the formation of salient policy regarding the use of REM by firms experiencing high risk of business failure.