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臺大管理論叢
第
26
卷第
2
期
5
2. Literature Review and Hypothesis Development
2.1 Auditor Industry Expertise
Auditor industry expertise is an important factor of auditor professional competence and
is emphasized by many auditing standards.
3
The AICPA (American Institute of Certified
Public Accountants) even issued specific auditing guidance for specific industry and further
emphasized the importance of developing industry expertise in audit quality control
guidelines. Chinese auditing standards also highlighted the importance of auditor industry
expertise. For example, “Specific Independent Audit Guideline No. 1” (MOF, 1995) requires
CPAs to acquire knowledge concerning the clients’ business, operations, and risks and
conduct audit procedures based on in-depth industry knowledge.
Besides the requirements of auditing standards, the incentive for audit firm industry
specialization also comes from market strategy. In a highly competitive audit market, audit
firm industry specialization is one of the two important differentiation strategies (the other
one is brand name), which allows audit firms to differentiate themselves from competitors in
fulfilling clients’ demands, and enables audit firms to compete on characteristics other than
price alone (Mayhew and Wilkins, 2003). Meanwhile, industry specialization helps audit
firms improve audit efficiency through economics of scale, create barriers to entry by
requiring new entrants to invest significant resources in relevant industry, and affect client-
relevant outcomes like audit fee and audit quality (Dunn and Mayhew, 2004). Previous
literature demonstrated that industry expertise can bring audit firms more fee premiums and
industry specialization is an efficient strategy to gain market share (Francis et al., 2005).
In fact, many big audit firms have restructured industry service lines and developed
industry expertise by investing time and financial resources in specific industries since
1990s. The Big 4 have their own specialized industries based on market share in 1990s: Ernst
and Young in the automobile and computer industries; KPMG in banks and insurance
companies; Price Waterhouse in computers, mining, and telecommunications; Arthur
Andersen in hotels, telecommunications, and utilities; and Coopers and Lybrand in
telecommunications (De Beelde, 1997).
In China, the audit market is somewhat different from developed countries. It is
competitive rather than oligopolistic, and there is increasing competition between local
3 For example, International Standards on Auditing No. 315 (IFAC, 2009) indicates that auditors must have
in-depth industry knowledge of the regulations, business risks, and related external factors.