Further evidence on the relationship between audit industry specialisation and public sector audit quality

Abstract

In general, prior research offers empirical support for the idea that audit industry specialisation is associated with higher audit quality in public sector organisations. A limitation in this literature, however, is that inferences are drawn from analyses confined to the audit firm level alone. In order to offer further insights into the relationship between audit industry specialisation and audit quality, and on whether such audit characteristics support the de facto harmonisation of accounting rules and regulations, this research includes both the audit firm and the auditor in charge of the financial audit as units of analysis. The results, based on an analysis of cross-sectional data from Swedish municipalities, show interesting differences between the audit firm and individual auditor levels. It is only at the audit firm level that the results consistently support the idea that industry specialisation is associated with higher audit quality. Although there is no such evidence at the individual auditor level, it should be considered that the results, in part, indicate that audit quality is highest in a situation of joint specialisation. That is, in combination with specialisation at the audit firm level, specialisation at the individual auditor level seems to offer something over and above audit firm specialisation alone.