Auditor Industry Specialization, Client Bargaining Power, and Audit Pricing

Abstract

Porter's (1985) analysis of competitive strategy is used to explain industry specialization by Big 6 accounting firms. In Porter's framework, industry specialization can be viewed as a differentiation strategy whose purpose is to create a sustainable competitive advantage relative to nonspecialist auditors. A differentiation strategy will lead to higher audit fees if valued by clients. We find evidence of higher fees for Big 6 industry specialists relative to nonspecialists in the U.S. audit market, but only for companies in the lower half of the sample based on size (assets <$123 million). By contrast, companies in the upper half of the sample do not pay a specialist premium, and audit fees actually decrease as a company becomes increasingly large relative to its auditor's industry clientele. Together these results suggest that audit fees are higher when clients are small and have little bargaining power, but audit fees are lower when clients have greater bargaining power and this is more likely when companies are large in absolute size and large relative to their auditor's industry clientele.

A Retrospective Look at the Effect of Auditor Specialization and Industry Concentration on the Cost of Audit Services

“…Prior research has shown that client firms pay a premium to auditors that are considered to be specialists in the clients' industry (Craswell et al, 1995;Defond et al, 2000;Casterella et al, 2004). (Note 1) Specialist auditors are seen to be providing a higher quality audit service to their clients (Simunic, 1980) and are, actually, sought out by audit committees that are both "active" and "independent" (Abbott and Parker, 2000).…”

“…The overall model had an R 2 of 89 percent. On the other hand, Casterella et al (2004) used a sample of 651 client firms audited by the Big 6 auditors and found evidence that fees are higher for Big 6 industry specialists. However, their results only held for companies with total assets of less than $123 million.…”

Estimating Audit Fees Post-SOX

“…Researchers have long attempted to tip the scales toward the science side of the estimation process by identifying variables that are correlated with fees. For example, audit fee models proposed by researchers include many variables intuitively related to fees, including client size, number of segments, amount of inventory and receivables, and opinion type ͑e.g., Casterella et al 2004͒. However, models also include variables that some may consider less intuitively related to audit fees including return on investment, the percentage of institutional ownership, and prior year stock returns ͑e.g., Geiger and Rama 2003;Whisenant et al 2003͒.…”

Desvendando a opinião da auditoria independente: o resultado da auditoria

“…A especialização na indústria pode ser vista como o uso de diferentes estratégias com o propósito de criar vantagem competitiva em relação a auditores não especialistas (Casterella, Francis, Lewis, & Walker, 2004). Assim sendo, pode ser considerada a extensão da quaserenda, procurando mitigar possíveis custos.…”

“…Assim sendo, pode ser considerada a extensão da quaserenda, procurando mitigar possíveis custos. A diferenciação terá impacto (1) na taxa de auditoria (fee) (Casterella et al, 2004;Huang, Liu, Raghunandan, & Rama, 2007;Fung, Gul, & Krishnan, 2012); (2) em firmas que procuram criar times de especialistas em nível global, com embasamento em conhecimentos de negócio e treinamentos específicos em determinado setor (Carson, 2009); e (3) na avaliação de risco 11 (Taylor, 2000).…”