Study On Relationship Between Audit Firm Industry Expertise And Audit Quality

Audit quality is the lifeline of audit firms, and the base of capital market's well development. Audit quality influences not only the survival and growth of audit firms, the development of the capital market, but also the prosperity and stability of social economy. Therefore, audit quality is a research hotspot in auditing now. Audit quality is affected by audit firms'independence, as well as professional qualification. Audit firm industry expertise is an important component of professional qualification, so whether it could improve audit firms'audit quality is the main purpose of our research.After reviewing the relevant literature, we analyze reasons about the development of audit firm industry expertise. From nineteen eighties, industry expertise is developing gradually when the international big8 audit firms evolved into present big4 audit firms. It's a differential strategy audit firms adopt against market competition. Subsequently, from the perspective of the connotation of audit quality, we theoretically analyze the relationships between industry expertise, audit firm size and audit quality and put forward research assumptions. Then, using a large sample of listed companies from 2004 to 2006 in A shares market, we examine the association between audit firm industry expertise, measured in terms of auditor market share in an industry, and audit quality, measured by a client's level of discretionary accruals, a common proxy for earnings management, controlling variables affecting discretionary accruals like company size, operating condition, financial risk, growth potential and audit committee, etc. The findings reveal that there is a significant positive relationship between industry expertise and audit firm size, and except 2005 samples, a significant negative relation between big20 audit firm industry expertise and discretionary accruals, but non-big20 audit firm industry expertise doesn't play a significant role on audit quality. At last, with a review to our country's audit market environment, we analyze the obstacles that restrict the audit firms to develop industry expertise, and present some suggestions on how to develop audit firm industry expertise for our country's audit firm.