The Validity of Auditor Industry Specialization Measures

2015 ◽  
Vol 35 (1) ◽  
pp. 139-161 ◽  
Author(s):  
Sophie Audousset-Coulier ◽  
Anne Jeny ◽  
Like Jiang
Keyword(s):  
Empirical Evidence ◽  
Earnings Quality ◽  
High Quality ◽  
Industry Specialization ◽  
Quality Models ◽  
Auditor Industry Specialization ◽  
Low Degree ◽  
Audit Fee ◽  
Important Measurement ◽  
Specific Expertise

SUMMARY In this research note, we examine the validity of the measures of auditor industry specialization in empirical archival audit research. Industry specialist auditors are auditors who have developed a specific expertise and are therefore able to provide high quality and more efficient services to their clients. Over the years, research scholars have developed a multiplicity of measures of industry specialization (ISP). We compare 30 ISP measures and find that the use of different ISP proxies results in inconsistent classifications of auditors as specialists. Using audit fee and earnings quality models, we further show that these inconsistencies have a significant effect on the inferences drawn from the models using ISP measures. We conclude that ISP measures exhibit a low degree of internal and external construct validity. This represents an important measurement challenge for researchers and casts some doubts on the robustness of prior empirical evidence found in auditor industry specialization research.

Auditor Industry Specialization and Earnings Quality

2003 ◽  
Vol 22 (2) ◽  
pp. 71-97 ◽  
Author(s):  
Steven Balsam ◽  
Jagan Krishnan ◽  
Joon S. Yang
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
Discretionary Accruals ◽  
Prior Work ◽  
Brand Name ◽  
Absolute Level ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of nonspecialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of nonspecialists.

scholarly journals Legal Systems and Earnings Quality: The Role of Auditor Industry Specialization

2007 ◽  
Vol 26 (2) ◽  
pp. 25-55 ◽  
Author(s):  
Soo Young Kwon ◽  
Chee Yeow Lim ◽  
Patricia Mui-Siang Tan
Keyword(s):  
Earnings Quality ◽  
Legal Environment ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response ◽  
International Setting ◽  
Using Data ◽  
The Impact ◽  
Industry Specialist

This paper extends prior studies in auditor industry specialization to an international setting and examines if the impact of industry specialist auditors on earnings quality is dependent on the legal environments. Using data for 28 countries over 20 industries from 1993 to 2003, we find that clients of industry specialist auditors have lower discretionary current accruals and higher earnings response coefficients than clients of nonspecialist auditors. In addition, we find that the impact of auditor industry specialization on earnings quality increases as the legal environment weakens. Collectively, the results suggest that the benefits from engaging the services of industry specialist auditors increase as a country's legal environment shifts from a strong to a weak environment. Our results are robust to the inclusion of additional control variables.

Do Industry-Specialist Auditors Influence Stock Price Crash Risk?

2014 ◽  
Vol 34 (3) ◽  
pp. 47-79 ◽  
Author(s):  
Ashok J. Robin ◽  
Hao Zhang
Keyword(s):  
Stock Price ◽  
Audit Quality ◽  
Tax Avoidance ◽  
Accounting Conservatism ◽  
Crash Risk ◽  
High Quality ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Governance Roles ◽  
Industry Specialist

SUMMARY Francis (2011) calls for more research on “the effect of audit quality on economic outcomes.” We respond by examining whether high-quality auditors reduce stock price crash risk, an important consideration for stock investors. We argue that high-quality auditors reduce crash risk because of their information intermediary and corporate governance roles. Using a large sample of U.S. stocks spanning the period 1990–2009, we examine the issue empirically by using auditor industry specialization as our proxy for auditor quality. Our main finding is a statistically significant and negative association between auditor industry specialization and stock price crash risk, implying that high-quality auditors can directly benefit investors by reducing tail risk. In addition, we provide evidence that industry-specialist auditors moderate the effects of opacity, accounting conservatism, and tax avoidance on crash risk. Finally, our main finding of a negative relation between auditor industry specialization and crash risk is robust to using city-level industry specialization as an alternate measure. JEL Classifications: G19; G32; M42.

Regulatory Quality and Global Specialist Auditor Fee Premiums

2017 ◽  
Vol 37 (3) ◽  
pp. 191-210 ◽  
Author(s):  
William N. Riccardi ◽  
Dasaratha V. Rama ◽  
K. Raghunandan
Keyword(s):  
National Level ◽  
Global Level ◽  
Industry Specialization ◽  
Global Industry ◽  
Auditor Industry Specialization ◽  
Regulatory Quality ◽  
Time Period ◽  
Audit Fee ◽  
Larger Sample ◽  
Extended Time Period

SUMMARY We first confirm the findings of Carson (2009) that global industry-specialist auditors earn a fee premium using a larger sample and a more extended time period. We then examine the effect of regulatory quality on the association between auditor industry specialization and audit fee premiums. We find that there are larger fee premiums for global specialist auditors in countries with stricter regulatory quality, indicating greater support for the argument that high-quality auditors can act as a complement to higher regulatory quality. We compare and reconcile our findings to prior studies, and show that inferences based on national-level auditor industry specialization differ from those based on examining global-level industry specialization.

Auditor Industry Specialization, Client Bargaining Power, and Audit Fees: Further Evidence

2007 ◽  
Vol 26 (1) ◽  
pp. 147-158 ◽  
Author(s):  
Hua-Wei Huang ◽  
Li-Lin Liu ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Survey Data ◽  
Bargaining Power ◽  
Audit Fees ◽  
Negative Association ◽  
Industry Specialization ◽  
Audit Market ◽  
Auditor Industry Specialization ◽  
Audit Fee ◽  
The U.S

Casterella, Francis, Lewis, and Walker (CFLW 2004) find, using survey data from 1993, that (1) there is a Big 6 industry specialization audit fee premium in the small client segment of the U.S. audit market, but (2) audit fees decrease for large companies as the client becomes increasingly large relative to an auditor's clientele. In this study, we first replicate and confirm the results of CFLW (2004), using audit fee data from SEC filings for fiscal 2000 and 2001. In the post-SOX period, we find that the results related to specialization continue to hold in fiscal 2004 but not in 2003—suggesting that 2003 is perhaps a unique year due to the flux in the audit market following the enactment of SOX. With respect to client bargaining power, our results in the post-SOX period differ from CFLW (2004) in that we observe a negative association between client bargaining power and audit fees for both the small and large client segments.

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