Unintended Consequences of Big 4 Auditor Office-Level Industry Specialization

International Journal of Accounting, Auditing, and Performance Evaluation. Vol. 14, Nos. 2/3, 254-289

Posted: 7 May 2018

See all articles by Sharad Asthana

Sharad Asthana

University of Texas-San Antonio

Rachana Kalelkar

University of Houston - Victoria

K. K. Raman

The University of Texas at San Antonio

Date Written: 2018

Abstract

The Big 4 audit firms currently dominate the US audit market. We investigate whether the extent of a Big 4 local office’s dependence on industry specialist clients impacts audit effort/earnings quality for the office’s specialist as well as non-specialist clients. Our findings suggest that greater dependence on specialist clients is associated with higher audit effort/earnings quality for specialist clients but also with lower audit effort/earnings quality for the office’s non-specialist clients. Our results hold when we propensity-match specialist and non-specialist clients to control for client characteristics as a possible confounding explanation. Our study is important, because it: 1) contributes to prior research that is largely silent on whether cross-sectional variations in reputation for industry-expertise are associated with variations in audit quality (DeFond and Zhang, 2014); 2) suggests that, it would be appropriate for PCAOB inspectors to focus on non-specialist clients at audit offices with greater dependence on specialist clients as an area representing higher risk of lower audit effort/quality.

Keywords: Big 4; industry specialization; non-specialist clients; PCAOB risk-based inspections; audit effort; earnings quality

Suggested Citation

Asthana, Sharad and Kalelkar, Rachana and Raman, K. K., Unintended Consequences of Big 4 Auditor Office-Level Industry Specialization (2018). International Journal of Accounting, Auditing, and Performance Evaluation. Vol. 14, Nos. 2/3, 254-289. Available at SSRN: https://ssrn.com/abstract=3164585

Sharad Asthana

University of Texas-San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

HOME PAGE: http://www.sasthana.com

Rachana Kalelkar (Contact Author)

University of Houston - Victoria ( email )

United States

K. K. Raman

The University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8749 (Phone)

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