Audit Hours and Unit Audit Price of Industry Specialist Auditors: Evidence from Korea

Abstract

Higher audit fees associated with auditor industry specialization could represent higher unit price charged by industry specialist auditors (ISAs) or the provision of a greater quantity of audit services. This study exploits a field setting in Korea, where the disclosure of audit hours is required in company annual reports, and finds that ISAs charge significantly higher total audit fees but also expend significantly greater audit hours than non-ISAs. When audit fees and hours are considered together, the unit audit price of ISAs is significantly lower than that of non-ISAs. This indicates that higher total audit fees associated with ISAs are likely to be attributable to greater audit hours associated with ISAs. However, greater audit hours for ISAs may suggest higher audit quality or may simply indicate that the additional audit work performed by ISAs is conducted by relatively cheaper junior auditors. Our work provides an alternative explanation for the higher total audit fees documented in the previous studies. ayant une sp ecialisation sectorielle est ex ecut e par des assistants d'audit dont les honoraires sont relativement moins elev es. Les auteurs proposent ainsi une nouvelle explication aux honoraires d'audit totaux plus elev es document es dans les etudes ant erieures.

Evidence of Industry Scale Effects on Audit Hours, Billing Rates, and Pricing

“…With respect to DOM_LEADER, we find that audit fees are higher (coeff. : 0.387, p-value < 0.05), in line with the findings reported inBae et al (2016), who rely on South Korean data. We, however, do not find higher billing rates associated with DOM_LEADER (p-value > 0.10), whileBae et al (2016) find a lower billing rate for dominant leaders.…”

“…20. Depending on the proxy of office industry scale, we find an adjusted R 2 of about 31-42 percent for the audit hours model, which is lower than that reported in previous audit hours studies in the U.S. and Australian settings (Bell et al 2008;Schelleman and Knechel 2010) but similar to audit fee models that use Belgian data (Dutillieux 2009). audit hours, in addition to a positive effect of market share-based industry specialization (Bae et al 2016). This confirms that market share-based and portfolio share-based measures (which are by construction correlated with scale) of industry specialization may capture two different aspects of industry knowledge and may have a differential effect on audit hours and/or audit fees.…”

“…It is well established in the auditing literature that industry-specific (accounting) knowledge is a valuable attribute for the execution of audit engagements (Danos et al 1989;Craswell et al 1995;Balsam et al 2003;Francis et al 2005;Malhotra and Morris 2009). The auditing literature shows that auditor industry knowledge is associated with higher fees (Ferguson et al 2003;Francis et al 2005;Craswell et al 1995;Cahan et al 2011;Numan and Willekens 2012;Bills et al 2015), higher audit quality (Balsam et al 2003;Gul et al 2009;Reichelt and Wang 2010), 4 and even higher audit effort (Bae et al 2016). Other studies report decreased audit fee premiums or even fee discounts associated with industry knowledge, depending on several factors: the type of audit firm (DeFond et al 2000), the proportion of clients audited in that industry (Cahan et al 2011), the client bargaining power (Fung et al 2012;Casterella et al 2004), and industry characteristics (Bills et al 2015).…”

“…In line with the previous research (Hay et al 2006), we include several other controls in the audit hours, audit fee, and billing rate models. First, consistent with Bae et al (2016), we construct a market share-based measure of industry specialization. We include a dummy variable equal to one when the audit firm is an industry leader in the region with a market share distance of at least 10 percent, and zero otherwise (DOM_LEADER).…”

“…Note further that prior research has investigated the effect of demand-side characteristics such as (relative) client size on audit fees (Casterella et al 2004;Fung et al 2012;Bills and Stephens 2016) or focus on the homogeneity of the industry (Bills et al 2015), while we take a supply-side perspective by focusing on the firm's market power and the billing rate. Fourth, different from Fung et al (2012) and Bae et al (2016), we study audit clients in the private firm segment of the audit market. While some prior studies analyze audit production function in public firms, little is known about audit production in the private client segment.…”