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    National Level, City Level Auditor Industry Specialization...
    research summary posted February 24, 2015 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience 
    National Level, City Level Auditor Industry Specialization and Cost of Debt
    Practical Implications:

    The results of this study are important for public companies to consider when choosing auditors.  The results clearly show that city-level industry specialist auditors are associated with lower cost of debt. Public companies which are thinking about engaging debt financing should seriously consider hiring city-level industry specialist auditors. The results of this study are also important for auditors. City-level industry specialist auditors can use this finding to promote themselves to existing and potential clients. Non city-level industry specialist auditors can consider the benefit of becoming city-level industry specialist auditors.

    For more information on this study, please contact Xie.


    Li, C., Y. Xie and J. Zhou. 2010. National level, city level auditor industry specialization and cost of debt. Accounting Horizons 24 (3): 395-417.

    auditor industry specialization; national level industry specialist; city level industry specialist; credit rating; bond spread
    Purpose of the Study:

    Prior studies using industry specialist as a proxy for audit quality usually focus on two areas: (1) the relationship between auditor industry specialization and audit fees; and (2) the relationship between auditor industry specialization and client earnings quality. The findings from these two strands of literature generally indicate that clients of industry specialist auditors pay higher audit fees, and, in turn, are associated with higher earnings quality as measured by discretionary accruals. In sum, these studies show that auditor industry specialization matters in addition to the Big N versus non-Big N differentiation.

    Recent research has begun to explore differences in industry leadership at the national and city levels. Examining audit fees and earnings quality, recent research finds that audit quality is a city level phenomenon with joint city and national industry leaders having the highest quality, followed by city-only leaders. National-only leaders do not distinguish themselves from non-leaders. The city-only industry specialization is important because individual auditors’ deep industry knowledge at the office level is an important determinant of audit quality. However, the empirical evidence that links national-city level industry specialists to investors, especially debt holders, is limited. Therefore, we investigate whether higher audit quality associated with industry specialist auditors at the city level benefits clients in their debt financing.

    Design/Method/ Approach:

    The research sample is from 2001 to 2006 focusing on US public companies. The authors use regression methods to identify the relationship between national level, city level auditor industry specialization and cost of debt. The authors use two alternative methods to measure cost of debt: credit ratings and bond spreads. 


    Consistent with the assumption that higher audit quality is associated with lower information risk, which benefits clients in raising debt capital, we find that firms audited by city level industry specialist auditors, either alone or jointly with national level industry specialist auditors, enjoy significantly lower cost-of-debt financing measured by both credit rating and bond spread. Our results suggest that, compared to clients of non-industry specialists, firms’ odds of worse credit ratings are 0.859 (0.664) times lower, and their bond spreads are 17 (16) basis points lower if they are clients of city-level-only (joint national and city level) industry specialists. In addition, our evidence shows that, for joint national and city level industry specialists, both information and insurance roles are significant to reduce cost-of-debt financing.

    Audit Quality & Quality Control, Auditor Selection and Auditor Changes
    Auditor Qualifications (e.g. size - industry expertise), Industry Expertise – Firm and Individual