IDEAS home Printed from https://ideas.repec.org/a/bla/acctfi/v61y2021i3p4513-4572.html
   My bibliography  Save this article

Effectiveness, efficiency, and fee premiums in audits led by industry specialist partners

Author

Listed:
  • Timothy B. Bell
  • David B. Bryan

Abstract

We use engagement‐level data from a Big 4 firm to examine whether industry specialist partners are associated with audit effectiveness, audit efficiency and fee premiums. First, we examine the relation of partner industry specialisation to audit effectiveness ratings made by the firm’s internal quality inspectors and find a positive association. Next, in tests using the effective audits subsample, we find that audits led by industry specialist partners have lower audit hours (i.e., audits are more efficient), higher total audit fees and audit fees per hour, and that both fee measures increase as efficiency increases.

Suggested Citation

  • Timothy B. Bell & David B. Bryan, 2021. "Effectiveness, efficiency, and fee premiums in audits led by industry specialist partners," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4513-4572, September.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:3:p:4513-4572
    DOI: 10.1111/acfi.12739
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/acfi.12739
    Download Restriction: no
    File URL: https://libkey.io/10.1111/acfi.12739?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Simon Dekeyser & Ann Gaeremynck & Marleen Willekens, 2019. "Evidence of Industry Scale Effects on Audit Hours, Billing Rates, and Pricing," Contemporary Accounting Research, John Wiley & Sons, vol. 36(2), pages 666-693, June.
    2. Gary S. Becker & Kevin M. Murphy, 1994. "The Division of Labor, Coordination Costs, and Knowledge," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education, Third Edition, pages 299-322, National Bureau of Economic Research, Inc.
    3. Palmrose, Zv, 1986. "Audit Fees And Auditor Size - Further Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 24(1), pages 97-110.
    4. Solomon, I & Shields, MD & Whittington, OR, 1999. "What do industry-specialist auditors know?," Journal of Accounting Research, Wiley Blackwell, vol. 37(1), pages 191-208.
    5. Vincent E. Owhoso & William F. Messier, Jr. & John G. Lynch, Jr., 2002. "Error Detection by Industry‐Specialized Teams during Sequential Audit Review," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 883-900, June.
    6. Gil S. Bae & Seung UK Choi & Joon HWA Rho, 2016. "Audit Hours and Unit Audit Price of Industry Specialist Auditors: Evidence from Korea," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 314-340, March.
    7. Chee‐Yeow Lim & Hun‐Tong Tan, 2008. "Non‐audit Service Fees and Audit Quality: The Impact of Auditor Specialization," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 199-246, March.
    8. Mark L. DeFond & K. Raghunandan & K.R. Subramanyam, 2002. "Do Non–Audit Service Fees Impair Auditor Independence? Evidence from Going Concern Audit Opinions," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1247-1274, September.
    9. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
    10. Mohd Kharuddin, Khairul Ayuni & Basioudis, Ilias G. & Hay, David, 2019. "Partner industry specialization and audit pricing in the United Kingdom," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 35(C), pages 57-70.
    11. Timothy B. Bell & Monika Causholli & W. Robert Knechel, 2015. "Audit Firm Tenure, Non‐Audit Services, and Internal Assessments of Audit Quality," Journal of Accounting Research, Wiley Blackwell, vol. 53(3), pages 461-509, June.
    12. Mikko Zerni, 2012. "Audit Partner Specialization and Audit Fees: Some Evidence from Sweden," Contemporary Accounting Research, John Wiley & Sons, vol. 29(1), pages 312-340, March.
    13. Timothy B. Bell & Rajib Doogar & Ira Solomon, 2008. "Audit Labor Usage and Fees under Business Risk Auditing," Journal of Accounting Research, Wiley Blackwell, vol. 46(4), pages 729-760, September.
    14. Rosen, Sherwin, 1983. "Specialization and Human Capital," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 43-49, January.
    15. Mark H. Taylor, 2000. "The Effects of Industry Specialization on Auditors' Inherent Risk Assessments and Confidence Judgements," Contemporary Accounting Research, John Wiley & Sons, vol. 17(4), pages 693-712, December.
    16. Krista Fiolleau & Kris Hoang & Karim Jamal & Shyam Sunder, 2013. "How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 864-890, September.
    17. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(4), pages 659-679.
    18. Kenneth J. Reichelt & Dechun Wang, 2010. "National and Office‐Specific Measures of Auditor Industry Expertise and Effects on Audit Quality," Journal of Accounting Research, Wiley Blackwell, vol. 48(3), pages 647-686, June.
    19. Chen†Lung Chin & Hsin†Yi Chi, 2009. "Reducing Restatements with Increased Industry Expertise," Contemporary Accounting Research, John Wiley & Sons, vol. 26(3), pages 729-765, September.
    20. Johnson, Paul E. & Jamal, Karim & Berryman, R. Glen, 1991. "Effects of framing on auditor decisions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 50(1), pages 75-105, October.
    21. Chee†Yeow Lim & Hun†Tong Tan, 2010. "Does Auditor Tenure Improve Audit Quality? Moderating Effects of Industry Specialization and Fee Dependence," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 923-957, September.
    22. Ettredge, Michael & Fuerherm, Elizabeth Emeigh & Li, Chan, 2014. "Fee pressure and audit quality," Accounting, Organizations and Society, Elsevier, vol. 39(4), pages 247-263.
    23. Okeefe, Tb & Simunic, Da & Stein, Mt, 1994. "The Production Of Audit Services - Evidence From A Major Public Accounting Firm," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 241-261.
    24. Michael Willenborg, 2002. "Discussion of “Brand Name Audit Pricing, Industry Specialization, and Leadership Premiums post†Big 8 and Big 6 Mergers†," Contemporary Accounting Research, John Wiley & Sons, vol. 19(1), pages 111-116, March.
    25. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    26. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    27. Gul, Ferdinand A. & Fung, Simon Yu Kit & Jaggi, Bikki, 2009. "Earnings quality: Some evidence on the role of auditor tenure and auditors' industry expertise," Journal of Accounting and Economics, Elsevier, vol. 47(3), pages 265-287, June.
    28. David Hay & Debra Jeter, 2011. "The pricing of industry specialisation by auditors in New Zealand," Accounting and Business Research, Taylor & Francis Journals, vol. 41(2), pages 171-195, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xingqiang Du, 2019. "Does CEO-Auditor Dialect Sharing Impair Pre-IPO Audit Quality? Evidence from China," Journal of Business Ethics, Springer, vol. 156(3), pages 699-735, May.
    2. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    3. Li-Jen He, 2021. "Does Industry Specialist Auditor Provide More Insights in Their audit report? An Empirical Study of Key Audit Matters Section," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(5), pages 1-4.
    4. Neal Arthur & Medhat Endrawes & Shawn Ho, 2017. "Impact of Partner Change on Audit Quality: An Analysis of Partner and Firm Specialisation Effects," Australian Accounting Review, CPA Australia, vol. 27(4), pages 368-381, December.
    5. Miguel Minutti‐Meza, 2013. "Does Auditor Industry Specialization Improve Audit Quality?," Journal of Accounting Research, Wiley Blackwell, vol. 51(4), pages 779-817, September.
    6. Christensen, Brant E. & Newton, Nathan J. & Wilkins, Michael S., 2021. "How do team workloads and team staffing affect the audit? Archival evidence from U.S. audits," Accounting, Organizations and Society, Elsevier, vol. 92(C).
    7. Bugeja, Martin, 2011. "Takeover premiums and the perception of auditor independence and reputation," The British Accounting Review, Elsevier, vol. 43(4), pages 278-293.
    8. Jennifer Martínez‐Ferrero & Isabel‐María García‐Sánchez & Emiliano Ruiz‐Barbadillo, 2018. "The quality of sustainability assurance reports: The expertise and experience of assurance providers as determinants," Business Strategy and the Environment, Wiley Blackwell, vol. 27(8), pages 1181-1196, December.
    9. Geiger, Marshall A. & Basioudis, Ilias G. & DeLange, Paul, 2022. "The effect of non-audit fees and industry specialization on the prevalence and accuracy of auditor’s going-concern reporting decisions," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 47(C).
    10. Timothy B. Bell & Monika Causholli & W. Robert Knechel, 2015. "Audit Firm Tenure, Non‐Audit Services, and Internal Assessments of Audit Quality," Journal of Accounting Research, Wiley Blackwell, vol. 53(3), pages 461-509, June.
    11. Wu, Bin & Wu, Yaqian & Zhang, Min & Li, Jiyuan, 2024. "Opening the black box of human resource allocations in audit firms: The assignment of audit partners to audit engagements," The British Accounting Review, Elsevier, vol. 56(2).
    12. Yang, Seunghee & Lee, Woo-Jong & Lim, Youngdeok & Yi, Cheong H., 2021. "Audit firm operating leverage and pricing strategy: Evidence from lowballing in audit industry," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(2).
    13. Stephen V. Brown & W. Robert Knechel, 2016. "Auditor–Client Compatibility and Audit Firm Selection," Journal of Accounting Research, Wiley Blackwell, vol. 54(3), pages 725-775, June.
    14. Yi-Hsing Liao & Hua Lee & Chao-Jung Chen, 2023. "The informational role of audit partner industry specialization," Review of Quantitative Finance and Accounting, Springer, vol. 60(1), pages 69-109, January.
    15. Sharad Asthana & Inder Khurana & K. K. Raman, 2019. "Fee competition among Big 4 auditors and audit quality," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 403-438, February.
    16. Xiong, Hao & Hou, Fei & Li, Hanwen & Wang, Huabing, 2020. "Does rice farming shape audit quality: Evidence from signing auditors level analysis," Economic Modelling, Elsevier, vol. 91(C), pages 403-420.
    17. Kharuddin, Khairul Ayuni Mohd & Basioudis, Ilias G & Farooque, Omar Al, 2021. "Effects of the Big 4 national and city-level industry expertise on audit quality in the United Kingdom," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 43(C).
    18. Knechel, W. Robert & Thomas, Edward & Driskill, Matthew, 2020. "Understanding financial auditing from a service perspective," Accounting, Organizations and Society, Elsevier, vol. 81(C).
    19. Mohd Kharuddin, Khairul Ayuni & Basioudis, Ilias G. & Hay, David, 2019. "Partner industry specialization and audit pricing in the United Kingdom," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 35(C), pages 57-70.
    20. Jennifer Martínez-Ferrero & Isabel-María García-Sánchez, 2018. "The Level of Sustainability Assurance: The Effects of Brand Reputation and Industry Specialisation of Assurance Providers," Journal of Business Ethics, Springer, vol. 150(4), pages 971-990, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:acctfi:v:61:y:2021:i:3:p:4513-4572. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/aaanzea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.