Auditor Industry Specialization And Its Economic Consequences:Empirical Evidence Based On Chinese Capital Markets

Since the 1980 s,the competition has become increasingly fierce in the independent audit service market of the developed countries represented by the United States and the United Kingdom.In order to seek an effective competitive strategy and gain the competitive advantage,large accounting firms have gradually moved toward industry specialization.In the international scope,KPMG Peat Marwick`s reorganized its organization in 1993,based on industry service lines.Audit quality guidelines of many countries such as the United States(AICPA,1993),the United Kingdom(UK APB,1995),and Australia(ASAICA,1989)also emphasize the importance of identifying,designing,and developing industry specialization.Western accounting theorists also draw conclusions from the national(firm-wide),localized(office specific)and auditor personal levels that industry specialist auditors can improve audit quality.Generally speaking,the customers of the industry specialist auditors have lower levels of discretionary accruals,higher earnings response coefficient,higher disclosure quality,lower likelihood of manipulating surplus to meet or exceed earnings forecasts and higher probability of issuing non-standard audit opinion reports,as well as lower probability of fraud associated with a financial report.The development of China's capital market,auditor legal liability,investor protection,audit market structure,government supervision and punishment,and many other institutional backgrounds are very different from Western developed countries;moreover,the research on the relationship between the domestic auditor industry specialization and audit quality still remains at the national(firm-wide)level of industry specialization,and there is no literature developing at the regional(office-specific)level.Therefore,this paper intends to further expand research in this field from the national(firm-wide)and regional(office-specific)levels,and combine with the special national conditions in China such as high concentration of equity in most listed companies and the absolute control of the government or family within the company.It will explore the regulatory role of the nature of control rights on the relationship between auditor industry specialization and audit quality,and systematically and comprehensively answer questions about the realization feasibility of audit quality improvement for industry specialist auditors based on China's institutional background.The audit quality improvement of industry specialist auditors is not only a prominent issue in the research of auditing theories,but is also a major concern for regulatory agencies and accounting firms.Whether the audit quality in concern can be improved determines the necessity for audit firms to restructure their audit service on the basis of the industry in which they partake.The four discretionary accrual estimation models and the three audit quality models used in the literature are employed to test the relationship between the auditor industry specialization and audit quality.Under the unified framework,it systematically and comprehensively answers the question of whether the industry specialist auditors can improve audit quality in the context of the Chinese system.By studying the data of A-share companies listed in Shanghai and Shenzhen Stock Exchange from 2007 to 2015,this paper analyzed the impact of auditor industry specialization on audit quality.The empirical finding based on the discretionary accrual model indicated that: industry specialist auditors are more capable of suppressing corporate earnings management behaviors and improving earnings quality,hence the audit quality as well;from the study,localized-level(office-specific)industry specialization were found to have a significant negative correlation with earnings quality;on the other hand,national-level(firm-wide)industry specialization and earnings quality were found to possess no obvious correlations with each other;and lastly,no solid basis were discovered in terms of the complementary influence between national-level(firm-wide)and localized-level(office-specific)industry specialization.Further verification was then performed using the earnings threshold(reached or exceeded)model and the non-standard audit report model.The obtained results were also consistent with that of the discretionary accrual model,which suggests that the influence of industry specialization in China is mainly manifested in the context of localized-level(office-specific)industry specialization.Moreover,the above results also imply that the reputation,knowledge and skill-base at the national-level(firm-wide)cannot be passed onto the office-level through the existing networks between the main firms and its branch offices.Audit pricing is a problem that is widely concerned by researchers in the audit field.This paper studies the relation between auditor reputation,industry specialization and audit pricing,based on data from 2012 to 2014.The results indicate a positive correlation between audit pricing with auditor's reputation and industry specialization.The premium of auditor reputation is around 89.89% while the premium of industry specialization measured by market share and the number of customers is 10.08% and 4.7% respectively.A further grouping study shows that industry specialization does not play a significant part in audit pricing of the Big 4 while it has a greater significance to other auditing firms,with its premium measured by market share and the number of customers reaching 8.87% and 2.4% respectively.The conclusions of this paper are of significance in guiding auditors to develop strategies that facilitate their growth and improve their industry specialization,as well as to shape brand reputation and enhance competitiveness.How the nature of control rights affects audit pricing is an issue which has drawn extensive attention of domestic accounting theory circle and practice circle.In combination with the special national conditions of high control concentration of listed companies and the large proportion of state-owned holding companies,when studying the impact of auditor industry specialization on audit pricing,the regulatory role of the nature of control rights is considered specifically,enriching the literature on the research of the auditor industry specialization premium.This paper studies the relation between the nature of control rights,auditor industry specialization and audit pricing,by using panel data of listed companies in China for the period from 2012 to 2014.The study results show that ultimate controllers which are state-owned listed companies pay less audit fees than non-state-owned companies,while auditors with industry specialization charge higher audit fees than auditors without industry specialization.A further grouping study shows that the auditor industry specialization in state-controlled listed companies which is measured by market shares has a positive correlation with audit pricing,while the auditor industry specialization which is measured by the number of customers has a non-significant relation with audit pricing;auditor industry specialization in non-state-controlled listed companies which is measured by each of the two methods has a positive correlation with audit pricing.The conclusions of this paper are of significance in guiding auditors to make audit pricing decision in consideration of control-related risks and to purposefully develop industry specialization.