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
Date Written: 2018
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
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