Audit Quality Improvements on the Path to Becoming an Industry Specialist: Theory and Evidence

• In Event: All Things Audit

Abstract

We examine analytically and empirically the strategic path auditors take towards becoming industry specialists in terms of their investments in the acquisition of industry specific knowledge and their pricing behavior. Based on the propositions in the model, we investigate whether audit quality improves as auditors grow to become specialists and whether the level of improvement is associated with 1) the uniqueness of the accounting expertise required to audit firms in the industry, and 2) the reward auditors can expect from investing in the acquisition of industry knowledge and expertise. We provide evidence that audit quality improves as auditors grow to become specialists. Further, audit quality improvements are more prominent among specialists serving in regulated industries, complex industries, and industries in which auditors are willing to undercut audit fees on the path to becoming specialists.

Authors

• Ronen Gal-Or, Northeastern University

• Esther Gal-Or, University of Pittsburgh