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Unintended consequences of Big 4 auditor office-level industry specialisation

Author

Listed:
  • Sharad Asthana
  • Rachana Kalelkar
  • K.K. Raman

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.

Suggested Citation

  • Sharad Asthana & Rachana Kalelkar & K.K. Raman, 2018. "Unintended consequences of Big 4 auditor office-level industry specialisation," International Journal of Accounting, Auditing and Performance Evaluation, Inderscience Enterprises Ltd, vol. 14(2/3), pages 254-289.
    • Handle: RePEc:ids:ijaape:v:14:y:2018:i:2/3:p:254-289
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