Effects Of Accounting Firm's Industry Expertise On Audit Quality

At the beginning of 20 centuries,the occurrence of many financial fraud cases such as Yinguangxia leads to crisis of confidence in the Chinese audit market.The regulatory announcement reveals that the lack of accounting firms' expertise is one of the essential reasons of audit failure.The Chinese Institute of Certified Public Accountants(CICPA)and ministry of finance introduce some policies to promote the improvement of certified public accountants(CPA)professional competence.Enhanced industry specialization is an important method to improve professional competence which has been studied during a long time but only based on the analysis of the headquarter.However,there are many differences between headquarters: service branch,service quality.Thus,industry specialization of branch is one more important element for the effect of audit quality than headquarters'.This paper reviews domestic and overseas literatures first and shows the recent study results of headquarter and branch and accounting firms' industry specialization has an effect on audit quality.Overseas studies conclude a positive relationship between industry specialization and audit quality.However,there are different results between domestic literatures because of insufficient development of domestic CPA industry and particularity of audit market.Then,based on theoretical analysis from De Angelo,this paper argues that industry specialization could increase the possibility to recognize illegal behaviors,which may improve audit quality.Thus,there is a hypothesis about the positive relationship between industry specialization of branch and audit quality.In addition,a major branch with good control for quality could offer more materials for industry specialization,and may handle more specific information of the audited entity due to geographic advantage,both of which could maintain a high level of industry specialization.As a result,this paper makes a further research for the size of accounting firm and geographical element which may have an influence on the relationship between industry specialization and audit quality.Using a sample of public firms audited by branch from A-stock market for the 2011-2015 period,this paper collects manually the data such as the number of CPA from branch and runs a multiple regression analysis.The results show that there is a positive relationship between industry specialization of branch and audit quality with other conditions fixed.In addition,the size of accounting firm could enhance this relationship.Moreover,if accounting firm and the audited entity are from different provinces,this positive relationship will be more significant.This paper is to examine the effect of industry specialization of branch on audit quality,to help regularity formulate polities,and to enhance internal management for accounting firms.