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A hidden risk of auditor industry specialization: evidence from the financial crisis

Author

Listed:
  • Cory Cassell

    (University of Arkansas)

  • Emily Hunt

    (Mississippi State University)

  • Gans Narayanamoorthy

    (Tulane University)

  • Stephen P. Rowe

    (University of Arkansas)

Abstract

We identify situations in which auditor industry specialization could be detrimental for audit outcomes. We predict that during periods of heightened industry-specific risk, specialist auditors from the affected industry could struggle to secure and allocate sufficient resources to mitigate the heightened risk because they have client portfolios concentrated in the affected industry. Using a measure of office-level industry concentration/specialization (as opposed to a market-based measure), we find that banking auditor industry specialization is associated with higher audit quality and more timely audits during the period before the financial crisis. However, during the financial crisis, banking industry specialization is associated with lower audit quality and less timely audits. Collectively, our results suggest that auditor industry specialization can be detrimental in certain circumstances and that audit firms and audit regulators should consider whether the audit markets have become too specialized to handle the resource allocation problems that crisis situations present.

Suggested Citation

  • Cory Cassell & Emily Hunt & Gans Narayanamoorthy & Stephen P. Rowe, 2019. "A hidden risk of auditor industry specialization: evidence from the financial crisis," Review of Accounting Studies, Springer, vol. 24(3), pages 891-926, September.
    • Handle: RePEc:spr:reaccs:v:24:y:2019:i:3:d:10.1007_s11142-019-09508-w
    DOI: 10.1007/s11142-019-09508-w
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    More about this item

    Keywords

    Auditor industry expertise; Auditor industry specialization; Workload compression; Resource constraints; Financial crisis;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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