Title: Unintended consequences of Big 4 auditor office-level industry specialisation

Authors: Sharad Asthana; Rachana Kalelkar; K.K. Raman

Addresses: Department of Accounting, College of Business, University of Texas at San Antonio, TX, USA ' Department of Accounting, School of Business Administration, University of Houston-Victoria, TX, USA ' Department of Accounting, College of Business, University of Texas at San Antonio, TX, USA

Abstract: 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 specialisation; non-specialist clients; PCAOB risk-based inspections; audit effort; earnings quality.

DOI: 10.1504/IJAAPE.2018.091066

International Journal of Accounting, Auditing and Performance Evaluation, 2018 Vol.14 No.2/3, pp.254 - 289

Received: 13 Mar 2017
Accepted: 12 Aug 2017
Published online: 09 Apr 2018 *

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