Transformations  in
Business & Economics

AUDITOR INDUSTRY SPECIALIZATION, INDUSTRY HOMOGENEITY, AND AUDIT COSTS: EVIDENCE FROM THE CHINESE CAPITAL MARKETS
Vojtech

ABSTRACT. Industry specialist auditors tend to invest in additional audit costs because of reputation concerns, whereas economies of scale caused by industry homogeneity lead to audit cost reduction. A data set of A-share listed companies in China during 2008-2016 was employed to explore the effect of industry specialization on audit costs and the moderating effect of industry homogeneity. This study selected audit fees and delays as proxy for audit costs. Moreover, Big 4 and non-Big 4 auditors were compared and scrutinized to distinguish the different effects of reputation concerns and economies of scale on audit costs. In addition, further investigation was conducted to verify whether reduced audit costs caused by economies of scale impaired audit quality. Results show that industry specialization has a significantly positive effect on audit fees and that no significant difference in audit delays exists between industry and non-industry specialists. Audit fees and audit delays decrease substantially in homogeneous industries, but audit fees charged by Big 4 auditors do not decline significantly. Industry specialization can also improve audit quality, while economies of scale resulting from industry homogeneity do not impair audit quality. In terms of competitive strategy, industry specialist auditors in homogeneous industries should adopt a cost leadership strategy to achieve competitive advantages. The findings in this study can provide far-reaching implications for auditor industry-specialized investments and clarify the reasonable pricing of audit service .

KEYWORDS:  auditor industry specialization, audit fees, audit delays, industry homogeneity, economies of scale.

JEL classification:  M42, M10, G31, G38.