An Empirical Study Of Auditor Industry Specialization, Audit Quality And Audit Fee

An Empirical Study of Auditor Industry Specialization, Audit Quality and Audit FeesFor the market for audit, accounting firm and clients are concerned about both the audit quality and audit fees. High quality of auditing can reduce accounting firm's litigation risk and enhance investors'confidence. One factor that affects the level of audit quality provided by an auditor is that auditor's industry knowledge. It can therefore be hypothesized that those auditors that specialize in a given industry have more opportunity to gain industry knowledge and therefore may possess more industry knowledge than their nonspecialist counterparts. Accounting firms with industry specialization will provide higher audit quality and get higher audit fees.Prior literature has asserted that audit providers with high market shares can be designated as industry specialists and that the fee premiums that sometimes attach to these auditors is evidence of a quality differentiated audit product.Using data from the audit market, we find that industry specialization have increased significantly in our country after 2007.In larger scale of industry, accounting firms'industry specialization have obvious rise. While in smaller scale of industry, the trend of industry specialization is not obvious.And then, we investigate the relationships among audit fee premiums, industry specialization and audit quality. The results of the regression analysis presented in this paper provide evidence that companies audited by an industry specialist have lower levels of DAC than clients of nonspecialist auditors, consistent with industry specialists providing a higher quality audit. One interesting finding is that the effect of specialization on DAC is nonlinear: absolute discretionary accruals actually increase slightly at lower levels of market share, but decline rapidly thereafter.Industry specialization can be viewed as a differentiation strategy whose purpose is to create a sustainable competitive advantage relative to nonspecialist auditors. A differentiation strategy will lead to higher audit fees if valued by clients. We find evidence of higher fees for industry specialists relative to nonspecialists. These evidence suggest that audit fees are higher when clients are small and have little bargaining power, and big clients have greater bargaining power.