The Economic Consequences of Auditor Industry Specialization PDF Download

Author: Ali R. Almutairi
Publisher:
ISBN:
Category : Corporations
Languages : en
Pages : 292

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Author: Mohamed Samy Eldeeb
Publisher:
ISBN:
Category :
Languages : en
Pages : 36

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Book Description
The effect of the economic financial crisis worldwide has increased the need for auditors to provide a high quality services to their clients. An important element considered by clients for selecting their auditors is whether the audit firm has specialization in particular industry. Audit firm industry specialization provides clients with value for money services to help management achieve efficiency and effectiveness in their operations. Other benefits for audit firms may include increased market share, audit tenure, better financial reporting and less earnings management, audit quality with less restatements of financial information, appropriate audit fees, less exposure to litigation risk, less enforceable action by supervisory bodies and ability to compete in highly competitive environment. Specialization was also seen as critical for the survival of the auditing profession. This research analyzes the effects of audit firm industry specialization on the retention of the audit firm and growth in its business. Factors such as whether the firm is a big 4, with international affiliation, local firm, type of industry and growth were also studied for audit firm retention and growth. The sample studied includes the top 100 publicly held companies' annual reports in the Egyptian stock market during the period 2007-2011 which are analyzed to determine the audit firms' retention and growth. The results support that industry specialization has an important effect on the auditor's retention especially for industry where capital investment is significant such as building, construction, financial services and housing and real estate. Big 4 audit firms retained their clients due to their industry specialization and brand name. The findings provided evidence that good knowledge of accounting & auditing standards resulted in audit firms with international affiliation competing with big 4 for clients' retention & growth in business. The result also showed some evidence that the auditing profession in Egypt is dominated by the big 4 and the Central Audit Organization.

Author: Cory A. Cassell
Publisher:
ISBN:
Category :
Languages : en
Pages : 47

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Using a measure of office-level industry concentration/specialization (as opposed to a market-based measure), we identify situations in which auditor industry specialization could be detrimental for audit outcomes. In stable environments, industry specialist auditors should be able to apply their unique experience and knowledge in ways that yield better audit outcomes. However, during periods of heightened industry-specific risk, specialist auditors from the affected industry could struggle to secure and allocate sufficient resources to mitigate the heightened risk in the affected industry because, by construction, specialists in the affected industry have a client portfolio that is concentrated in the affected industry (i.e., there is insufficient resource slack). We test our predictions by investigating the effects of the recent financial crisis on audits of clients from the banking industry. We find that, during the period before the financial crisis, banking auditor industry specialization is associated with higher audit quality and more timely audits. However, during the financial crisis, the results indicate that banking auditor industry specialization is associated with lower audit quality and less timely audits. Collectively, our results suggest that auditor office-level industry specialization can be detrimental in certain circumstances and that audit firms and audit regulators should consider whether the audit market, audit firms, or audit offices have become too specialized to handle the resource allocation problems that crisis situations present.

Author: Ali Almutairi
Publisher: VDM Publishing
ISBN: 9783836426770
Category : Business & Economics
Languages : en
Pages : 156

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Prior literature has conjectured that auditor industry specialization is an important dimension of audit quality. This book addresses the economic benefits that companies may achieve by employing auditors with industry expertise. It examines the link between the employment of industry specialist auditors, and the degree of information asymmetry and the cost of debt of a client company. More specifically, the analysis should answer the following questions: Is there a relation between the employment of an industry specialist auditor and the level of information asymmetry of client companies? Is there a relation between the employment of an industry specialist auditor and the cost of debt of client companies? Is the economic impact of the employment of an industry specialist auditor on the cost of debt larger for financially troubled client companies? The book is directed towards researchers in business, regulators, auditors, credit agencies, and investors.

Author: Keith A. Houghton
Publisher:
ISBN:
Category : Auditing
Languages : en
Pages : 34

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While auditing literature has investigated the main effect of auditor industry specialization on audit fees and planning decisions, the underlying processes explaining differential pricing between specialists and other auditors are largely unexplored. This study seeks to fill a portion of this gap by examining the interaction between auditor industry specialization and auditee risk. Using data derived from a sample of public sector audits, this study examines distinctions in how different auditors price risk. Building upon the differentiation between "premium" and "discount" specialists investigated in Houghton, Dolley, Jubb and Monroe (2000) and possibly found in DeFond, Francis and Wong (2000), the results of this study demonstrate that, in response to increased auditee risk, premium specialists price risk relatively less than other auditors. In contrast, discount specialists increase fees relatively more than other auditors. These results may reflect differences in the skill sets and work processes that underlie specialization for these two specialist sub-groups. The results are also consistent with increased competencies of premium specialist auditors in the audit of risky clients.

Author: Devin Williams
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Prior research on auditor industry specialization documents fee premiums for local audit offices that are industry specialists. This research assumes that the effects of specialization are uniform across markets. We examine industry specialization based on the economic theory of industry agglomeration (geographic areas with high industry concentration). Agglomeration economies can facilitate access to knowledge for auditors serving a specific industry in those locations. We find that industry specialists in agglomerations earn a fee premium in excess of specialists in other markets. We find that non-specialist offices in agglomerations also earn fee premiums in that industry when compared to non-specialists in other markets even when controlling for these groups' absolute share of the national market. We also address whether or not this expertise can be shared among offices in an agglomeration specialist's firm. We find that audit offices that have easy connections to a within-firm office in an agglomerated market can earn a fee premium relative to more distant offices, suggesting a benefit from knowledge transfer. This fee premium accrues to offices that would not be considered a specialist using traditional market share measures in a given industry. These findings indicate that the benefit of industry specialization depends on more than local market share.

Author: Jagan Krishnan
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This study compares the earnings response coefficients of clients of industry specialist and non-specialist auditors. Prior work (e.g., DeAngelo 1981) has suggested that auditors offer different levels of audit quality, in response to client variations in the demand for different levels of audit quality (Watts and Zimmerman 1986). One component of the quality difference across auditors is industry specialization (Craswell et al. 1995). Empirical evidence on the effect of industry specialization on audit quality proxies such as audit fees, auditor litigation and compliance with accounting standards is mixed. This study examines the hypothesis that industry specialization leads to a better quality of audit by comparing the earnings response coefficients of clients audited by industry specialists with those of clients not audited by industry specialists. Teoh and Wong (1993) argue that audit quality is positively associated with the client's quality of earnings and therefore the earnings response coefficient (ERC), which is the responsiveness of the stock market to information about unexpected earnings. They present evidence that one measure of audit quality, auditors' brand-name (Big 6 or not), is positively associated with the ERC. This paper extends this argument by examining the effect of another facet of audit quality, auditor industry specialization, on the ERC. The results suggest that, after controlling for previously established correlates of the ERC, as well as industry affiliation, clients of industry specialist auditors have higher ERCs than clients of non-specialist auditors.

Author: Debra C. Jeter
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
As audit quality is paramount in returning the profession to the “priesthood” in the wake of accounting scandals such as Enron and bank failures, perhaps the most important question with respect to industry specialization is whether or not industry specialists provide truly superior quality audits. Research in industry specialization by auditors has focused to date primarily on addressing this question; the pricing of audits by specialists is a related issue also examined in a number of studies. Research suggests that specialists are associated with higher earnings quality for their auditees, whether due to intervention in the reporting process, or because management anticipates such intervention and constrains opportunistic earnings management. The role of industry specialization in audit pricing has been frequently addressed in the literature, and yet remains largely unresolved. Some studies present evidence of specialist premiums, while others find no premiums or premiums only for certain subsets of clients. In its 2003 report, the GAO expressed some concern that auditor choice was limited for large national and multinational companies requiring industry-specific expertise, noting that an auditor who audits a number of smaller companies within an industry may not have the necessary expertise to handle the larger clients in that industry. Most researchers, however, find little evidence of adverse impacts such as oligopolistic pricing as a result of the increased audit market concentration resulting from the audit firm mergers and demise of Arthur Andersen. Industry specialization, if pursued as a means of enhancing the knowledge and understanding necessary to conduct superior audits, should result in benefits to both client and auditor. Industry specialists may be able to provide higher levels of assurance because they are more likely to assess risks, and to detect financial reporting errors and irregularities, and are thus equipped to deliver better planned and more effective audits.

Author: Mohamed A. Hegazy
Publisher:
ISBN:
Category :
Languages : en
Pages : 23

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Book Description
This paper aims at investigating the effect of industry specialization on the audit quality and earnings quality. It examines the relation between industry specialization and earnings quality, financial reporting quality, and audit quality. The research posits that industry specialization constrains earnings management. In addition, it hypothesized a positive relationship between industry specialization and financial reporting quality. An experiment was conducted in an audit firm with international affiliation in Egypt to test the research hypotheses. The results indicate that there is no significant difference between industry specialist auditors and non-specialists in constraining earnings management. In addition, findings support that financial reporting quality was significantly higher when specialists conducted the audit. The results provide empirical evidence consistent with the hypothesis that auditor with industry specialization improves audit quality. Finally, industry specialization enables auditors to realize the amendments in auditing standards better than non-specialists.

Author: Ashoka Mody
Publisher: World Bank Publications
ISBN:
Category : Bancos extranjeros
Languages : en
Pages : 33

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Increasing foreign participation and high concentration levels characterize the recent evolution of banking sectors' market structures in developing countries. Martinez Peria and Mody analyze the impact of these factors on Latin American bank spreads during the late 1990s. Their results suggest that foreign banks were able to charge lower spreads relative to domestic banks. This was more so for de novo foreign banks than for those that entered through acquisitions. The overall level of foreign bank participation seemed to influence spreads indirectly, primarily through its effect on administrative costs. Bank concentration was positively and directly related to both higher spreads and costs. This paper--a product of Finance, Development Research Group--is part of a larger effort in the group to understand banking sector market structure changes in developing countries.