Download This PaperIndustry-Specific Knowledge Transfer in Audit Firms: Evidence from Audit Firm Mergers in China
The Accounting Review, Forthcoming
68 Pages Posted: 8 Aug 2018 Last revised: 28 Jun 2021
Date Written: June 26, 2021
Abstract
Using a difference-in-differences approach, we examine the effect of industry-specific knowledge transfer on audit performance after a merger of two Chinese audit firms with different levels of expertise in an industry. For clients in an industry audited by both merging audit firms, those audited by the audit firm less specialized in that industry belong to the treatment group, while all other clients belong to the control group. We find an economically-significant improvement in audit quality (as reflected in a reduction in financial misstatements) for the treatment group relative to the control group in the same merged audit firm. We show that the treatment effect is not driven by changes in auditor incentives or personnel movement and is more pronounced when we expect stronger communication between the less and more specialized auditors after the merger. We caution that our findings are specific to China and may not generalize to other countries.
Keywords: Knowledge Transfer, Audit Firm Merger, Industry Expertise, Audit Quality, China
JEL Classification: M42
Suggested Citation: Suggested Citation
S.P. Kothari
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)
National University of Singapore (NUS) - Sustainable & Green Finance Institute (SGFIN) ( email )
Singapore