Industry Knowledge Shared across Partners within Audit Offices and Audit Quality

• In Event: Auditor Networks

Abstract

We conjecture that the opportunity for audit partners to share personal industry knowledge with each other within audit offices benefits audit quality. Using recently available Form AP data, we analyze each partner’s client portfolio and construct measures of the extent to which partners within the same audit office are able to share similar industry knowledge and specialization. We find negative associations between shared industry knowledge and both restatement likelihood and absolute abnormal accruals. In further cross-sectional analyses, we find that knowledge sharing benefits audit quality for all but a partner’s largest client in offices that are either the overall city-level industry leader or not. However, for partners’ largest clients, industry knowledge sharing is associated with audit quality only when the office is also the city-level level leader. This indicates an interplay between our novel construct of partner knowledge sharing and extant constructs of city-level auditor office industry leadership. Taken together, our evidence is consistent with audit quality benefiting from shared industry knowledge and specialization within an audit office.

Authors

• Meiling Zhao, University of Arizona

• Paul N Michas, University of Arizona-Tucson

• Daniel Russomanno, University of Arizona-Tucson