The Accounting Firm Industry Expertise And Audit Quality Related Research

Independent auditing is one of the fundamental systems serving the capital market. Audit quality is not only the lifeline for auditing firms, but also plays a significant role in the social economic orderliness. Audit quality is achieved by two key aspects: the auditing firms'independent standpoint, as well as their professional qualifications. Thus, as an integral part of auditing firms'professional qualifications, industry expertise is also an important factor facilitating audit quality. This paper analyzes the positive influence of auditing firms'industry expertise on their audit quality, followed by an empirical model to examine if the auditing firms possessing industry expertise result in high audit quality. The industries this paper researches are confined to three manufacturing ones: mechanical appliance, metal and nonmetal, petrochemicals. This paper adopts an approach that takes industry experience and specialized investment into account to measure the extent of auditing firms'industry expertise, and uses the level of discretionary accruals as a proxy for audit quality. After controlling variables affecting discretionary accruals like company size, operating condition, financial risk, auditing firm size, etc, the paper finds that clients of auditing firms that have relatively more industry expertise have lower positive discretionary accruals than clients of those having less industry expertise, while industry expertise is not associated with the negative discretionary accruals. The findings indicate that industry expertise does be able to facilitate audit quality, and the irrelevance between industry expertise and negative discretionary accruals reflects the fact that auditors usually take a compromising action under the pressure from their clients when they are exposed to a low-risk event and environment. At last, with a view to the auditing market environment in our country, the paper analyzes the significance for auditing firms to develop industry expertise and improve their audit quality, as well as some obstacles that exist and need to be wiped out gradually in the coming future, and presents some suggestions with regard to improvements in market environment and auditing firms'operation.