Empirical Analysis on Industry Specialization of Audit Firms and Its Audit Quality

Author: Ryo Kato, Hu Dan Semba
Date: 2016/6/20
No: DP2016-014
JEL Classification codes: M42, M41
Language: English
[ Abstract / Highlights ]

This study aims to empirically examine the influence of the auditor’s industry specialization on its audit quality. Following the dissolution of ChuoAoyama -PricewaterhouseCoopers in 2007, the Japanese Big N audit market changed from Big 4 regime to Big 3 regime. Consistent with previous studies, absolute discretionary accruals are used as a proxy for audit quality along with six proxy variables for audit industry specialization. Additionally, we employed propensity score adjustment as a causal inference framework in order to lead more robust results. After analyzing a sample of publicly listed Japanese firms for fiscal years 2001 to 2006 (Big 4 period) and 2008 to 2012 (Big 3 period), we find that Japanese auditors perform higher quality audits during whole period. In addition, industry-specialized auditors’ audit quality increases at a higher rate than for non-industry-specialized auditors in the Big 3 period compared to the Big 4 period.