A hidden risk of auditor industry specialization: evidence from the financial crisis

Cory Cassell (), Emily Hunt (), Gans Narayanamoorthy () and Stephen P. Rowe ()
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Cory Cassell: University of Arkansas
Emily Hunt: Mississippi State University
Gans Narayanamoorthy: Tulane University
Stephen P. Rowe: University of Arkansas

Review of Accounting Studies, 2019, vol. 24, issue 3, No 5, 926 pages

Abstract: Abstract We identify situations in which auditor industry specialization could be detrimental for audit outcomes. We predict that during periods of heightened industry-specific risk, specialist auditors from the affected industry could struggle to secure and allocate sufficient resources to mitigate the heightened risk because they have client portfolios concentrated in the affected industry. Using a measure of office-level industry concentration/specialization (as opposed to a market-based measure), we find that banking auditor industry specialization is associated with higher audit quality and more timely audits during the period before the financial crisis. However, during the financial crisis, banking industry specialization is associated with lower audit quality and less timely audits. Collectively, our results suggest that auditor industry specialization can be detrimental in certain circumstances and that audit firms and audit regulators should consider whether the audit markets have become too specialized to handle the resource allocation problems that crisis situations present.

Keywords: Auditor industry expertise; Auditor industry specialization; Workload compression; Resource constraints; Financial crisis (search for similar items in EconPapers)
JEL-codes: G38 L11 L25 M41 M42 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11142-019-09508-w

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