Final Report

Methodology

The purpose of our project is to determine whether there is an association between the geographic location of industry leaders in an auditing firm and the auditing pricing and quality of that same auditing firm’s industry clients. Professor Reidenbach and I mainly focused on the Big Four accounting firm: Deloitte, EY, KPMG and PwC. I collected office location, industries served, services provided, the individuals leading each respective industry, and these leaders’ office locations information from these four accounting firms. It was quite challenging to determine the names of the industry leaders within each firm since they are not available within a database and are not always easily located on the audit firms’ websites. Then, we used the Wharton Research Data Services (WRDS) and picked the audit analytics dataset to collect audit pricing/fee and audit opinion data using excel format and SAS Windows_32 dataset format. Professor Reidenbach used the software application and the sets of data we have collected to come up with results for our study.

Research summary/ Accomplishments

We defined the major controlled variables for the regression analysis that Professor Reidenbach performed. The controlled variables are Log of Total Assets, Ratio of Long Term Debt over Total Assets, Ratio of EBIT over Total Assets, Qualified Audit Opinion, Inventory Record, Joint Leader (City and Nation), National Leader, City Leader, Leader CBSA (which means that the client company’s headquarter location is the same as the industry leaders’ offices) and groups of industries such as Oil and Gas, Retail and Utilities that we believe will have an impact on the result. We performed a two-tailed t test and used 0.05 as the significance level. For one of the most important controlled variables, Leader CBSA, we got the p-value as 0.2687, which is way greater than 0.05. This leads us to conclude that there is no association between industry leaders’ office locations and audit fee even when the office locations are headquarter locations. After discussing with Professor Reidenbach, we believe that one possible cause is missing data for certain industries. There is a major system called Standard Industry Code (SIC) that Professor Reidenbach used to pick out the industry data used to run the regression analysis. It is a coding system that experts created on breaking down various industries accounting firms work with and there are 99 groups broken down.  Therefore, this will be the main task for us to work on for finishing up the project.

Reflection

So far, working with Professor Reidenbach has been a great opportunity for me to get the initial exposure of research in auditing. This study provides additional insight into the way that the auditor industry specialization construct works in practice. It also has shown me an interesting insight into whether the way audit firms structure their industry leadership and their market share are related. There is definitely more depth we could research further for the topic, which we will continue working on.

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