Beyond industry boundaries: impact of auditors’ related industry knowledge on audit quality and audit fees

We examine whether auditors’ knowledge of clients’ related industries impacts audit quality and audit fees. Identifying related industries based on the Input–Output “Use Table” from the Bureau of Economic Analysis, we construct an absolute, nonrelative measure to capture auditors’ knowledge in their clients’ related industries. Our results show that a greater level of knowledge in related industries is associated with higher audit quality and lower audit fees after controlling for the auditor's expertise (specialization) in the client's industry. Further analyses indicate that the quality effects are more salient for an auditor who is not an expert in the client's industry, whereas the fee effects are prevalent across focal client engagements. The evidence suggests that non-specialist auditors’ cross-industry knowledge developed via economic links can, to some extent, substitute for specialization in the client industry. In view of advanced technologies that spur increasing interdependence between industries, our findings deliver an important message: Auditors can improve audit efficiency and offer higher quality audits by expanding economies of scope and leveraging their knowledge across clients’ interrelated industries.