The Effect Of Industry Expertise For Audit Firms On Audit Fees

Industry expertise for the audit firm means that the auditor concentrated audit business on one or a number of industries to make the audit business present industry characteristics in the independent audit market. The audit firm will be accumulated with different knowledge of the industry in auditing different industries or centrally make professional investment on the industry according to the operation strategy to have enough knowledge and professional skills of specific industry to form the industry expertise. With the gradual development of audit market in China, in recent years, the development of the firms’industry expertise was paid attention by auditing standards makers and accounting industry regulators. The establishment of the standards and files fully reflected the significance of industry expertise and provided the potential conditions of the development of industry expertise. We should make further investigation about what is the level of industry expertise in China, whether and how the industry expertise affects the audit pricing, whether the scale of the audit firms has different effects on the audit pricing. Under this circumstance, it is theoretical and practical important to research on industry expertise and audit fees and to explore whether industry expertise is the effective approach to get audit firms’development.Based on the combination of the theoretical and empirical method, this paper uses A-share listed companies in the period of the year2005-2010as the sample and makes multiple regression equation to explore the relationship between audit firms’industry expertise and audit fees. This paper includes six parts:The first part is the introduction:It mainly introduces the background, the significance, the ideas and the methods of the research and the paper framework of this paper.The second part is domestic and foreign literature review:From the domestic and abroad two aspects, this paper brings a literature review of the relationship between industry expertise and audit fees and makes summarizations.The third part is the system background and basic theory. According to the theory of industrial organization and potter competition theory, this paper analyzes the relationship and mechanism between industry expertise and audit fees to get ready for hypothesis in the next part.The forth part is the research and design:According to the third part of the theoretical basis, this paper proposes hypothesis, sets up independent variables, dependent variables and control variables, and makes definition and detailed measurement of the variables. Then it builds a regression model and explain the origin of data and the choice of samples to get ready for the later empirical test.The fifth part is empirical analysis:It includes descriptive statistics, the correlation analysis and multiple regression analysis; from two aspects of the overall samples, the samples after the year2007, this paper does the test, gets the empirical results and carries on the analysis to test the validation of assumptions put forward.The sixth part is the empirical results and policy recommendations:Firstly, it summarizes the empirical results; secondly and puts forward relevant policy suggestions for audit firms’development and the healthy and well-organized audit market; finally, it expounds the innovation of this paper and places the limitations of this paper and future research direction.This paper finds:the firm that has industry expertise can cause economies of scale to reduce the audit cost of a single customer and the firm can send the cost saved to the customer to get more audit clients and market shares by reducing audit fees; the firm with industry expertise can offer different high quality audit services to the customers and the customer can realize the difference and be willing to pay for it, which leads to the increase of audit fees. In order to eliminate the effect of audit firm scale and brand reputation on audit fees, this paper divides the audit firms after the year2007into "BIG10" and "non-BIG10" and does the multiple regressions to explore the effect of the only factor of industry expertise on audit fees. In addition, this paper also explore whether the influence degree of industry expertise of different scale of audit firms on audit fees are the same. The results show that:whether in the whole audit market, the samples after the year 2007, audit fees are significantly positive related to industry expertise for audit firms; the level of the firms’industry expertise increased after the year2007and the degree of the influence is more than that before the year2007; the influence degree of industry expertise on audit fees for "BIG10’firms is more than that for "non-BIG10"firms.This contribution of this paper reflects in the flowing:the paper uses the latest data in the periods of2005-2010, offers supporting evidences for the researches existing and offsets the shortcoming of the old data; under the background of the system in China, the paper considers the effect of the establishment of the new auditing standards and files on the firms’industry expertise which can affect the audit pricing; according to the different scale of audit firm, it divides the audit firms after the year2007into "BIG10" and "non-BIG10" and eliminates the influence of scale and reputation on audit fees to make the paper focus on the effect of industry expertise on audit fees. Moreover, this paper also explore whether the influence degree of industry expertise of different scale of audit firms on audit fees are the same.