Firm versus Partner Measures of Auditor Industry Expertise and Effects on Auditor Quality
Posted: 12 May 2010 Last revised: 2 Jan 2011
Date Written: April 15, 2006
Prior studies report that earnings quality is higher for firms audited by the Big 4 industry specialists, measured as national-level leadership (Balsam et al., 2003; Krishnan, 2003, 2005) or as both national-level and city-specific leadership (Francis et al., 2005, 2006). This paper first examines whether the Big 4 audit quality is associated with auditor industry expertise, measured as both individual partner–level and audit firm-level leadership. We focus on a sample of listed firms in Taiwan where audit reports must be audited and signed by the two signing auditors as well as by an audit firm. Following and extending Francis et al. (2005, 2006), we classify industry specialists into three groups: (1) auditors that are industry specialists at both the individual partner-level (i.e. the lead signing auditors) and the firm-level; (2) auditors that are industry specialists at the individual partner-level, but not the firm-level; and (3) auditors that are industry specialists at the firm-level, but not the individual partner-level. For accruals analyses, we find that differential discretionary accruals due to industry expertise are driven by a combination of firm-level and partner-level expertise. For audit opinion analyses, we find that differential likelihood of a modified audit opinion (hereafter MAO) is primarily attributable to signing auditor specialists. We also find that firm-level auditor specialists alone are not associated a higher likelihood of issuing a MAO. However, firm-level specialists, in combination with signing auditor specialists, can add something over and above the effects of the signing auditor specialists alone. Second, to test for differential audit quality between signing auditors (i.e., lead and concurring auditors), we also classify the Big 4 industry specialists into three groups: (1) both the lead and concurring auditors are industry specialists, (2) lead auditors that are industry specialists, but concurring auditors are not, and (3) concurring auditors that are industry specialists, but lead auditors are not. We find that clients of lead signing auditor specialists, either alone or in conjunction with concurring auditor specialists, have smaller accruals and are more likely to receive a MAO compared to those of non-specialists. In addition, concurring auditor specialists alone are not associated with higher audit quality, regardless smaller accruals or a higher MAO likelihood. Thus, we conclude from these analyses that industry expertise is not homogeneous across auditors within the same firm in Taiwan.
Keywords: Individual partner industry expertise, Discretionary accruals, Modified audit opinion, Audit quality
JEL Classification: M40, M41
Suggested Citation: Suggested Citation