Isn’t That Special? The Relationship Between Auditor Industry Specialization, Audit Quality, and Audit Pricing Re-examined

• In Event: Continental Breakfast - RESEARCH INTERACTION FORUM
  In Roundtable Session: Research Interaction Forum

Abstract

Prior research has shown inconsistent results regarding the relationships between auditor industry specialization, audit quality, and audit fees. We provide new insight into these relationships by utilizing a theory-based methodology for specifying industry specialization that addresses known issues with prior specifications. We find that auditors which can portray themselves as industry specialists charge fee premiums for their services. In addition, we find evidence that the knowledge gained from industry specialization can be leveraged to provide audit quality benefits, but can also be over-leveraged to a point where the audit quality benefits recede. Thus, we identify a previously unobserved decoupling between audit quality and audit pricing among industry specialist auditors. We posit that this is occurs because audits have attributes of credence goods such that the quality on any particular engagement is not readily determinable; thus, pricing is based more on reputation than actual audit quality.

Authors

• Matthew Holt, University of Dayton

• Christopher Calvin, University of Dayton