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

Ryo Kato and Hu Dan Semba
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Hu Dan Semba: School of Economics, Nagoya University

No 2016-014, Keio-IES Discussion Paper Series from Institute for Economics Studies, Keio University

Abstract: 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.

Keywords: Audit Quality; Industry Specialization; Causal Inference; Propensity Score; IPW (search for similar items in EconPapers)
JEL-codes: M41 M42 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2016-06-17
New Economics Papers: this item is included in nep-acc
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