Heterogeneity in Expertise in a Credence Goods Setting: Evidence from Audit Partners

Review of Accounting Studies, Forthcoming

58 Pages Posted: 19 Sep 2016 Last revised: 30 Nov 2020

Date Written: April 30, 2020

Abstract

We examine the heterogeneity of experts in a credence goods setting. In our analytical model, clients are ex ante uncertain about how much effort experts need to provide to solve their problem, which is either simple or difficult. Experts have varying degrees of expertise. Less qualified experts are equally effective at solving simple problems, but they are less effective at solving difficult ones. We show that clients pay a fee premium to more qualified experts, even for simple problems. This premium increases with the ex ante probability that the client has a difficult problem. We empirically test the model predictions in the context of partner industry expertise for the U.S. operations of the Big 4 audit firms. We find, consistent with the model, a positive association between partner industry specialization and audit fees, even for simple audits, and a negative association between partner specialization and the client’s probability of restatements only for difficult audits. Further, the industry specialization premium is higher in industries with higher proportions of difficult audits. Consistent with credence good agency issues, the specialization premium for simple audits is mitigated when information asymmetry between client and auditor is lower.

Keywords: Audit Engagement Partner, Audit Quality, Audit Fees, Industry Specialization, Expert-Client Agency Costs, Disclosure

JEL Classification: M42, D82, L14, L22

Suggested Citation

Aobdia, Daniel and Siddiqui, Saad and Vinelli, Andres G., Heterogeneity in Expertise in a Credence Goods Setting: Evidence from Audit Partners (April 30, 2020). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2840332 or http://dx.doi.org/10.2139/ssrn.2840332

Daniel Aobdia (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

Saad Siddiqui

Public Company Oversight Board ( email )

Andres G. Vinelli

Public Company Oversight Board ( email )

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