Auditor Industry Specialization and Evidence of Cost Efficiencies in Homogenous Industries

Bills, Kenneth L.; Jeter, Debra C.; Stein, Sarah E.

doi:10.2139/ssrn.2321741

Cited by 34 publications

(105 citation statements)

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“…We challenge the latter assumption by examining whether the specialist premiums vary across firms within an industry as a result of a trade-off between firm-specific and industry-specific knowledge requirements. Our results, in conjunction with recent studies that attempt to explain differences in specialist premiums across industries (e.g., Cahan et al, 2011;Francis & Seavey, 2012;Bills et al, 2014), provide an explanation for why prior research on specialist premiums has not been entirely consistent. While anecdotal evidence suggests that each of the Big 4 auditors pursues an industry specialization strategy (e.g., Hogan & Jeter, 1999;Cahan et al, 2011), our results suggest that the returns to such a strategy will depend on firm-specific, as well as industry, characteristics.…”

Section: Discussionsupporting

confidence: 68%

“…They find office-level industry leadership, a measure of industry specialization, is associated with higher audit quality and larger fee premiums when industry complexity is high but not when industry complexity is low. In contrast, Bills, Jeter and Stein (2014) suggest that when an industry is characterized by both operational homogeneity and accounting complexity, specialist auditors pass a portion of their economies of scale to their clients, leading to fee discounts relative to specialists in other types of industries. CGHJ argue that auditors are more likely to specialize in industries with high IOS.…”

Section: Background and Hypothesesmentioning

confidence: 97%

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The Association between Client‐specific Investment Opportunities and Audit Fees of Industry Specialists and Non‐Specialists

et al. 2014

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Audit clients' investment opportunity sets (IOS) include firm‐specific opportunities that are unique to the client, as well as opportunities generalizable to the client's industry and opportunities even more generically available to all firms. Prior research does not examine the variation in audit fees related to firm‐specific IOS nor how firm‐specific IOS affects the premiums charged by industry specialist auditors. We find that firm‐specific IOS plays a distinct role in the pricing of audit services, leading to higher fees as the auditor demands compensation for increased audit risk. Further, we find that the ability of an industry specialist auditor to charge fee premiums is reduced in the case of clients that are highly differentiated based on firm‐specific IOS, as the knowledge gleaned in auditing other clients within the industry is often not applicable to clients in more unique IOS environments. We contribute to the literature by showing that industry specialist premiums are not constant for firms in the same industry; rather, they reflect a trade‐off between firm‐ and industry‐specific knowledge.

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Section: Discussionsupporting

confidence: 68%

Section: Background and Hypothesesmentioning

confidence: 97%

The Association between Client‐specific Investment Opportunities and Audit Fees of Industry Specialists and Non‐Specialists

et al. 2014

Self Cite

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“…Note this prediction stands in contrast to the findings in the specialized knowledge audit fee literature, which suggest that auditors only provide economies of scale fee discounts to clients with strong bargaining power when pressured to do so (Castrella et al 2004;Huang et al 2007;Fung et al 2012;Bills, Jeter, and Stein 2015). The difference in predictions is not surprising, however, given the number of meaningful differences between the audit and tax domains that may affect the manner in which audit and tax professionals determine the amount to bill to their clients.…”

Section: Initial Client Volume and Subsequent Client Billingsmentioning

confidence: 59%

The Psychology of Billing

Hansen

Jackson

Schaefer

et al. 2017

Contemporary Accting Res

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Contracting between tax entities and tax professionals occurs millions of times every year, yet little is known about the nature of these economic interactions. This study examines the effect of commonly occurring contextual factors on tax professionals’ billing decisions for tax research. These contextual factors are unrelated to the tax research itself and the time it takes to conduct the tax research, but we find that billing decisions are strongly influenced by the three non‐time‐related contextual factors that we manipulate. Initial client volume impacts amounts billed for tax research, with lower initial client volume resulting in higher per client fees. Further, we find that initial billing decisions serve as value billing benchmarks for unanticipated subsequent clients who benefit from research conducted for initial clients. As a result, subsequent clients are billed higher fees when they follow a smaller number of initial clients. We also find that client referrals are billed higher fees than nonclient referrals because professionals attempt to avoid making initial clients feel as though they have been treated unfairly relative to subsequent clients who would otherwise be billed lower fees. The results of this study are relevant beyond the traditional confines of accounting research—they are relevant to the millions of tax entities that contract with tax professionals each year.

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“…With such expertise, auditors are able "to develop expertise-related economies of scale that allow them to maintain relatively low fees" (Pearson and Trompeter 1994, 116). Bills, Jeter, and Stein (2015), Cahan, Jeter, and Naiker (2011), Cairney and Stewart (2015), and Fung, Gul, and Krishnan (2012) also provide evidence supporting the argument that expertise allows auditors to provide their services at lower fees, at least in some industries. Similar to this view, Yardley et al (1992) explain that the dominant auditors are able to develop efficiency gains.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 65%

Audit Market Concentration and Audit Fees: An International Investigation

et al. 2017

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Several large auditor consolidations in the late 1980s-early 1990s, along with Arthur Andersen's collapse in 2001, facilitated global audit market concentration. Subsequently, regulators have expressed serious concern over the potential detrimental effects of this concentration, including cartel pricing. This study investigates the association between audit market concentration and audit fees. Using a large sample from 17 countries, our study yields three principal findings. First, consistent with regulators' concern, a significantly positive association exists between market concentration and fees. Second, the country-level legal regime changes this association dramatically: while significant and positive in countries with a weak legal regime, the association weakens and eventually becomes negative as the legal regime strengthens. Third, these associations are more pronounced among clients of non-Big 4 auditors than those of Big 4 auditors. These findings provide regulators and other stakeholders with important insights into the effects of audit market structure on audit pricing.

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Auditor Industry Specialization and Evidence of Cost Efficiencies in Homogenous Industries

Cited by 34 publications

References 0 publications

The Association between Client‐specific Investment Opportunities and Audit Fees of Industry Specialists and Non‐Specialists

The Association between Client‐specific Investment Opportunities and Audit Fees of Industry Specialists and Non‐Specialists

The Psychology of Billing

Audit Market Concentration and Audit Fees: An International Investigation

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