The Association between Industry, Regional City Specialization and the Audit Fee Premium/Discount: Evidence from Hong Kong Sar, China

Abstract

This study investigates the relationship between auditor specialization and the audit fee premium/discount in Hong Kong SAR, China. The study has three main hypotheses: 1) that there is an audit fee premium when an audit firm is an industry, regional city and/or regional city-industry specialist; 2) that the audit fee premium increases when a Big 4 audit firm is an industry, regional city and/or regional city-industry specialist; and 3) that the level of audit fees decreases when a non-Big 4 audit firm is an industry, regional city and/or regional city-industry specialist. Both the ranking and market share benchmark methods are used for defining specialists. Also, the two industry classification systems, HSIC and NAICS are tested. In addition, the number of auditees is used to define market share. The sample consists of more than 1,000 Hong Kong listed companies from 2004 to 2006. Examining auditor specialization across a three year period is a different approach from previous studies, which allows the study to show whether specialist premiums or discounts are stable over time. Results indicate that the three types of auditor specialization examined exist in Hong Kong SAR, China and they are reasonably stable across time. However mixed results are found across the three years in relation with the level of audit fees. The main results provide strong evidence of a fee premium for regional city specialization under various definitions in one year, but these significant results did not hold in the two subsequent years. Some evidence of an industry specialist fee premium is detected in 2004 and 2005 while a discount is found in 2006 under some definitions. Results indicate none of the three types of specialization consistently appears in every year to justify any fee premiums/discounts unless influenced by other economic conditions.