Does Auditor Industry Diversity Affect Audit Quality? Evidence from Tax and Non-Tax Accounts

• In Event: Diversification and Geographic Distance

Abstract

This study examines the effect of audit office client base industry diversity on audit quality. We specifically examine the audit quality of tax and non-tax accounts separately due to the different people and processes involved in auditing the tax accounts compared to non-tax accounts. Using seemingly unrelated bivariate probit regression and restatements as our proxy for audit quality, our results indicate that audit office industry diversity improves the audit quality of tax accounts and impairs the audit quality of non-tax accounts. We interpret these results in the context of the tradeoff between general knowledge and industry-specific knowledge. Our results support the notion that increased general knowledge through audit office industry diversity can improve the audit effectiveness of tax accounts, but the loss of industry-specific knowledge impairs the audit effectiveness of non-tax accounts. Cross-sectional analysis reveals that our primary findings are more prevalent among larger audit offices. We also present evidence that auditor industry diversity improves audit quality of both tax and non-tax accounts when the client is more complex, suggesting that auditor industry diversity is most effectively applied to clients that require a broader knowledge base.

Authors

• Erik Beardsley, Texas A&M University

• Nathan Chad Goldman, The University of Arizona

• Thomas C. Omer, University of Nebraska–Lincoln