A Study On Auditor Specialization

The role of independent auditor to ensure the quality of accounting information has the wide concern. The credibility of accounting information has the variations because of different in the quality of the audit. In previous audit researches, especially the empirical researchers, the researchers pay attention to the independent factor of audit quality, and not to the professional competence of audit quality. On the conditions of auditors having invariant independence, if the auditor masters more knowledge and has more experiences about customer's industry and environment, grasps special accounting standards and rules, understands normal economic and technical indicators, they will enhance their professional capabilities, reduce the significance of audit risk and improve audit quality. In fact, many audit failures took place, a very important reason for this is that the incumbent auditor lacks of customer-related industry knowledge. The case of audit failure about Lincoln Savings Bank of United States, as well as China's Guangxia Company, indicates that the reasons are concerned about the lack of industry's professional knowledge and skills.With the intense competition in the audit market, auditors need to find some effective methods for competition, in order to maintain their strategic advantage. In the early 1990s, large accounting firms began to change their organizational structures, which, at that time, were built around the traditional product lines of auditing, taxation, and consulting. The firms restructured their activities around broad industry sectors, and began marketing their expertise around industry specializations. Today, the Big 4 firms continue to promote their industry-based expertise. Specialization in the audit market is critical for the future survival of the audit firms, and specialization is one of the five top issues impacting the CPA profession in the 21st century (AICPA 1998).So, why the auditor develop the industry specialization? How to measure the auditor specialization? Whether the auditor specialization can improve audit quality? Whether the auditor specialization can earn audit fee premiums? The dissertation answers these problems by theoretical analysis and empirical test. The dissertation has 6 chapters.Chapter 1 is preface, introducing the background, objective and research methodology. In Chapter 2, the author constitutes the fundamental theory from the demand and supply point of view. From the angle of demand of audit, the essential motive for auditor to develop industry specialization is the demand by economic accountability. Besides, Improving the information asymmetry, reducing information rent are the contract motive; reducing the risk of information and helping decision-makers are the information motive; signaling the indication of industry specialist to users and earning fee premiums are the signal motive. From the angle of supply of audit, Economies of scale, learning by doing, risk-based audit, product differentiation strategy, and reputation mechanism are the motives for auditor to develop industry specialization.In Chapter 3, the author discusses the issues on the measure of auditor specialization. After surveying the literatures, the author use the tool of correlation coefficient to explore the inner relationship among all kinds of measures of industry specialization. Then, the author uses Canonical Correlation Analysis to explore the relationship between industry market-based variables and industry portfolio-based variables. In the end section of Chapter 3, a PCA method is applied to constitute a comprehensive evaluation index for auditor industry specialization. The contributions of Chapter 3 have three aspects: (1) the author fistly explores the inner relationship among all kinds of measures and between two categories, i.e. market-based variables and industry portfolio-based variables. (2) verifies the ideas which was promoted by Neal and Riley(2004) that the whole measures of auditor industry specialization can be divided into two complementary group.(3) fistly promotes a new comprehensive evaluation index for auditor industry specialization. All the works in Chapter 3 give a tool to test the the relationship between industry specialization and audit quality or audit fees.In Chapter 4, the author empirically explores the relationship between auditor industry specialization and audit quality. The sample range is from 2001 to 2006, in Chinese list companies market. The number of samples is 6929. We use one comprehensive evaluation index, five industry market index, and two industry portfolio index as the proxy of industry specialation., and use the absolutely value of discretionary accrual as the proxy of audit quality. After controlling other factors which affect audit quality, we find that, in the whole, the auditor industry specialization comprehensive evaluation index has no significant correlation with the absolutely value of discretionary accrual (DAC), which means that in Chinese audit market, auditor industry specialization can't improve audit quality. This result is supprising contrasting by American relavant results. In the end of this chapter, the author put forwards six causes to explain why auditor industry specialization cannot improve audit quality in Chinese audit market.In Chapter 5, the author tests the industry specialization effect on audit fees. The author uses samples range from 2001 to 2006, in Chinese list company audit market; investigates the relation between auditor industry specialation and audit fees. The results indicate (1) In whole samples, Auditor industry specialization is positively correlated with audit fees; (2) In big client market, auditor industry specialization also positively correlated with audit fees; (3) But in small client market, auditor industry specialization has no significant effect on audit fees. The results means that: (1) On the whole, the client has differencial audit demand, but auditor gain audit fee premium depending on signaling function; (2) In fact, the auditor industry specialization premium is drived by big clients market because big clients usally have high agent cost and think those auditors with higher industry market share will provide more special service; (3)In the small client market, the clients have less agent cost, so that the demand for auditor industry speacialization is low, this lead to no premium in small clients market; (4)Besides, the author broaden the concept of product differentiation in order to better explain the value of industry specialization in Chinese audit market.In Chapter 6, the author summarizes the main conclusions made in the dissertation and points out its limitations and directions of the later study. What's more, there are some innovations in the dissertation.They are as follows:1. The author firstly reseaches the relationship among all kinds of measures of auditor industry specialization; firstly employs Canonical Correlation Analysis to explore the relationship between industry market-based variables and industry portfolio-based variables; firstly constitutes a comprehensive evaluation index for auditor industry specialization and use this robust measure to test the relationship between auditor industry specialization and audit quality or audit fees.2. The author systemly tests the relationship between auditor industry specialization and audit quality. By using above meaures of autior industry specialization, the study gives many new results and the author put forward six causes to explain why auditor industry specialization cannot improve audit quality in Chinese audit market.3. The author systemly tests the relationship between auditor industry specialization and audit fees and gain many new conclusions. By using above meaures of autior industry specialization, the empirical results are more robust contrasted by other research conserning the relationship between auditor industry specialization and audit fees.