The Effects of Firm-Wide and Office-Level Industry Expertise on Audit Pricing

This study examines the role of auditor industry expertise in the pricing of Big 5 audits in Australia. We test if the audit market prices an auditor's firm-wide industry expertise, or alternatively if the audit market only prices office-level expertise in those specific cities where the audito...

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Bibliographic Details
Published in:The Accounting review 2003-04, Vol.78 (2), p.429-448
Main Authors: Ferguson, Andrew, Francis, Jere R., Stokes, Donald J.
Format: Article
Language:English
Subjects:
Accounting
Accounting firms
Analysis
Auditing
Audits
Big Five accounting firms
Business audits
Business structures
Case studies
Cities
Economic aspects
Enterprises
Expertise
Fees
Fees & charges
Finance
Financial audits
Industrial market
Industry
Leadership
Market share
Price premiums
Professional fees
Service industries
Studies
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Summary:This study examines the role of auditor industry expertise in the pricing of Big 5 audits in Australia. We test if the audit market prices an auditor's firm-wide industry expertise, or alternatively if the audit market only prices office-level expertise in those specific cities where the auditor is the industry leader. We document that there is an average premium of 24 percent associated with industry expertise when the auditor is both the city-specific industry leader and one of the top two firms nationally in the industry. However, the top two firms nationally do not earn a premium in cities where they are not city leaders. We further document that national leadership rankings are, in fact, driven by the specific offices where accounting firms are city leaders. Thus, the overall evidence supports that the market perception and pricing of industry expertise in Australia is primarily based on office-level industry leadership in city-specific audit markets.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr.2003.78.2.429