A Study On The Correlation Between Auditor Industry Specialization And Audit Market Performance

The audit market structure and market behavior lead to audit market performance. In order to improve the market performance, China institute of Certificated Public Accountant has taken many active measures and announced some significant decision. As the most important factor of auditing market performance, audit quality directly indicates the efficiency of market performance. Audit quality is decided by two aspects:the auditor firms'independent standpoint and their professional qualifications. So, as an integral part of auditor firms'professional qualifications, industry expertise also becomes an important factor effecting audit quality.New audit standard released and modern risk-oriented audit implemented in 2006 will promote auditor firm to reorganize their staff and practice the strategy of industry specialization.In 2007, CICPA released the draft of promoting audit firms to become bigger and stronger, which will encourage auditor firms to grow bigger and strong by industry specialization. Based on these, this paper wants to study on the effect of auditor firm industry specialization to audit market performance in Chinese market.This paper analyzes the potential influence of auditing firms'industry expertise on the audit quality based on the theory of industry organization, followed by an empirical model to examine if the auditing firms possessing industry expertise result in high audit quality. The object of this paper researches are confined to those listed on Shenzhen and Shanghai stock market. 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, auditing firm size, operating condition, financial risk, etc, the paper finds that clients of auditing firms that have relatively more industry expertise have lower discretionary accruals than those having less industry expertise. The findings indicate that industry expertise could facilitate audit quality. Finally, 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 auditor firms'operation.The main innovations of this study are as follows:(1) Provide theoretic and empirical study on auditor industry specialization's effect on audit market performance of China's audit market. (2)Apply division and specialization theory and competitive strategy theory to analyze industry specialization' effect on audit market performance, which also rich the theories themselves and provide an effective way to expand auditor firm's scale.