This study examines the role of auditor industry expertise in the pricing of Big 5 audits in Australia. We test if the audit market prices an auditor's firm-wide industry expertise, or alternatively if the audit market only prices office-level expertise in those specific cities where the auditor is the industry leader. We document that there is an average premium of 24 percent associated with industry expertise when the auditor is both the city-specific industry leader and one of the top two firms nationally in the industry. However, the top two firms nationally do not earn a premium in cities where they are not city leaders. We further document that national leadership rankings are, in fact, driven by the specific offices where accounting firms are city leaders. Thus, the overall evidence supports that the market perception and pricing of industry expertise in Australia is primarily based on office-level industry leadership in city-specific audit markets.

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This paper investigates brand name, industry specialization, and leadership audit pricing in the wake of the mergers that created the Big 6 and the Big 5 accounting firms. For samples of Australian listed public companies in each of the postmerger years 1990, 1992, 1994, and 1998, we estimate national audit fee premiums for the Big 6/5 auditors and the industry specialists and leaders. We find limited support for the ability of the Big 6/5 to obtain fee premiums over non-Big 6/5 for those industries not having specialist auditors. Nonspecialist Big 6/5 auditors are able to obtain fee premiums over nonspecialist non-Big 6/5 auditors for those industries having specialist auditors. However, this result only holds among the smaller half of our sample. We do not find strong support for the presence of industry specialist premiums in the postmerger years, especially after 1990, using various definitions of industry specialist. We find, at best, limited support for the presence of industry leadership premiums. The evidence suggests that after the Big 8/6 audit firm mergers, some caution is required in generalizing the Craswell, Francis, and Taylor 1995 finding of national market industry specialist premiums. More generally, the study raises questions about the tenuous link between the concept of specialization and national market-share statistics.

Big 6 market shares based on aggregate national data have been used in prior research to infer market leadership and industry expertise, and to differentiate Big 6 accounting firms from one another. In this study it is demonstrated that further differences exist with respect to city‐specific audit markets, both between firms and within the same firm across different city markets. The specific finding is that the national market leader is not the city‐specific market leader the vast majority of time. Usefulness of the city‐level unit of analysis is further demonstrated by re‐examining the 1989 mergers creating Ernst & Young and Deloitte Touche. The primary effect of the Ernst & Young merger was to increase market shares in cities in which the pre‐merger firms already had significant market shares, resulting in an increase in the number of cities in which the merged firm achieved top ranking. In contrast, the primary effect of the Deloitte Touche merger was an expansionof the number of city‐level markets in which the merged firm had significant (though not leading) market shares. The findings of this study suggest that, in order to move beyond our current understanding, important audit research questions such as the reason for particular auditor–client alignments, the competitive nature of markets, audit pricing of reputations, and auditor reporting and independence issues should be investigated in city‐level markets where audit contracting occurs and where Big 6 market shares (and presumably reputations) vary widely from city to city.

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This study investigates the magnitude of total asset writedowns for a random sample of Australian industrial companies. We adopt an income strategy approach in operationalising our magnitude of writedowns construct to consider the set of accounting policies and negative accruals potentially available to managers. Our focus is on the incentives for and constraints on management to make asset writedowns. We find that the magnitude of writedowns observed are associated with managers' incentives to writedown impaired assets that have declined in value, as well as the firm's capacity to absorb the financial statement effects of the writedown. The number of senior management changes found to be associated with greater writedowns in prior studies is also supported in this study when only writedowns taken to the income statement are considered. The quality of corporate governance mechanisms does not vary systematically with the magnitude of writedowns.