The Effect Of Industry Specialization On Audit Quality

High audit quality could reduce audit risk that audit firms face, inhibiting the behavior of company management for making false financial information. Due to the late beginning of China’s audit market, the amount of the audit service buyers are less than the audit firms, resulting to the oversupply of buyers’market, intensified the fierce competition among audit firms contending for clients resources.As a result, the independence of audit firms are more likely impacted by clients.According to the previous literature, auditors’industry specialization has a great impact on the audit quality.Generally, industry specialist auditors are able to provide high quality audit reports for listed companies with their in-depth specialization and skills.As of the effect of industry specialization on audit quality, it is generally thought that industry specialization audit firms possess higher independence,more rigorous working attitude and lower economic clients independence,which inable them to issue auditor’s report more objective.But for now,as our audit market is still in the development phase,the domestic literature about industry specialization are well less established, and there remain some differences in the determination of research period, empirical methods and sample,therefore different opinions still remain on whether the industry specialization could improve audit quality.As large-scale clients have large impact on the market, the loss of large clients will have greater impact on the audit firm’s reputation, and affect the proportion of the market share in the industry, so firms typically provide high audit services quality for large customers.While in the small-scale clients market, due to the small impact of a single customer on the market,the audit firms tend to provide relatively low audit quality on the consideration of cost minimization.Previous research literature almost study the economic consequences of industry specialization on the market-share based measure,using the market-share based measure of industry specialization with no consideration of the constitution of the market share. This paper proposed the following research question:How the client importance affects the relationship between industry specialization and the audit quality?This paper aims to analyze the effect of industry specialization and client importance on the audit quality,and how the client importance affect the relationship between industry specialization and the audit quality,which has important theoretical and practical significance for establishing fair competition audit market environment.This paper is divided into six parts:Introduction provides background, research methods, significance and framework. The section of background should describe the actual conditions of the domestic and international audit market, and briefly outline the changes in the relevant provisions and requirements of the domestic and international audit marketThis section includes the definition of the major purpose,the object and research significance of this paper,and build a research framework.Literature review mainly analyses the conclusions of research about the relationship between industry specialization and audit quality,and the relationship between client importance and audit quality, then summarize the different views and conclusions of the scholars.This section is not only the empirical basis,but also the main basis of the regression model design.Theoretical analysis elaborates this paper by describing the theory about the major factors that affect auditors’industry specialization, and how the client importance affect audit quality, using the relevant theory to provide support for the following research hypotheses.Research design makes hypotheses based on the literature review and theoretical analysis.This paper chooses the companies listed in the A-share market as research sample to determine the research model.Empirical results studies the relationship between industry specialization and audit quality,and whether the relationship is affected by client importance.The results show that, relative to the audit firms that does not have the industry specialization, industry specialist audit firms are affected by clients when provide audit services.The more important the clients are, the higher the cost of resources invested by the audit firms,and more complex the designed audit procedures are,thus improving the quality of audit services. As relatively unimportant audit clients cause little effects to the accounting firms because of their small scale, the risk and cost of litigation faced by the audit firms are small when providing relatively low quality audit services. Strategies based on the principle of cost minimization and price competition lead to relatively small audit resource and low audit quality supplied by audit firms.This paper finds that audit firms’industry specialization could provide more professional skills for the clients, therefore both the level of fees requested by the auditors and audit quality provided by auditors are high.Overall, clients importance will affect audit quality, audit firms’independent judgment may be affected by the audit client’s economic dependence. However, from the perspective of industry specialist firms, different behaviors exist for important and unimportant clients. Affected by client importance, audit firms will provide higher audit quality for the relative important clients.The innovation of this paper mainly reflects in the following aspect:This paper analyzes the relationship between the industry specialization and audit quality from the perspective of client importance.This study indicates that the industry specialization audit firms treat different types of clients with different competitive strategies.Research limitation of this paper is mainly reflected in the following two aspects:Firstly, the defect of the research model,the selection of variables and the difference of the research methodology may have certain influences on the result.Secondly,this paper investigates the industry specialization of audit firms. while Defondand&Francis (2005) have shown that, in order to better understand the behavior of the auditors, it is recommended that the analytic hierarchy process should be further studied to the level of individual auditors. Analysis about audit industry specialization with audit quality may be more persuasive.So it may as well take more effort and time to control those prohibitive factors.