Do Seasoned Industry Specialists Provide Higher Audit Quality? A Response

Abstract

Using several audit quality measures, Minutti-Meza (2013, MM) argues that controlling for client characteristics through matching eliminates the association between auditor industry specialization and audit quality. Gaver and Utke (2019, GU) argue that this result is unstable across matching techniques and, after considering specialist tenure, seasoned specialists generally provide higher audit quality than unseasoned auditors or non-specialists. Eshleman and Guo (2020, EG) propose that – for accruals-based audit quality measures only – industry fixed effects, not client characteristics, eliminate the association between specialization and audit quality. We note that EG’s (and MM’s) conclusions rely on a misinterpretation of p-values, where an insignificant p-value is taken as evidence of no effect (Cready 2020). We then revisit GU after including industry fixed effects and find that GU’s main conclusions generally hold: 1) descriptively, auditors tend to fall backwards into specialization rather than building specialization to attract clients, so that knowledge likely develops over time, 2) propensity score matching should be used with caution or not at all, and 3) specialist tenure generally plays a role in the relation between specialization and audit quality. We find new evidence that the effect of an additional year of specialist tenure is similar to the effect of an additional year of auditor tenure. Finally, we discuss future research opportunities regarding auditor industry specialization.