Accounting Firm Size, Industry Expertise And Audit Quality

In any capital market auditors play a vital role in the issurance of high quality financial reports. Audit services product is a special commodity with social credibility. Audit quality have a direct impact on survival and development of certified public accountants career. Scale enlargement and industry specialization are two strategies to inevitably adopt in audit firms' development. Thus, how expanding audit scope and developing industry expertise influence audit quality, which becomes an important area of audit theory and practice.In the west, research on the relation between auditor size and audit quality has a history of over 20 years and has achieved comprehensive achievements;their research on the relation between industry expertise and audit quality started rather late, but has so far received relatively abundant empirical evidence. In China securities market is an emerging market. In recent years domestic scholars gradually started empirical research on the relation between auditor size and audit quality, but there's some extent inadequate in selected variables, samples' difference and research methods etc, so study conclusions are very inconsistent;studies on how industry expertise impact audit quality are almost blank in the domestic academia. In view of these reasons, in conjunction with China's specific national conditions, this thesis tries to make a research on the association between auditor size, industry expertise and audit quality.After reviewing the relevant literature, from the perspective of the connotation of audit quality, we theoretically analyze the relationship between auditor size, industry expertise and audit quality and then make our research assumptions. Subsequently, using a large sample of listed companies from 2002 to 2004 in the Shanghai stock market, this research examines the association between auditor size, auditor industry expertise, measured in terms of both auditor market share in an industry and an industry's share in the auditor's portfolio of client industries, and a client's level of discretionary accruals, a common proxy for earnings management. Our findings are consistent with the notion that auditor size is an assurance of increaseing audit quality, but the ability of guarantee will be weakened because of the exsitence of other factors;while industry expertise benefits auditor reducing risks and improving audit quality, but for different level of auditor size, its industry expertise to the quality of audit services is a difference.