Academic journal article The International Journal of Business and Finance Research

Service Quality, Size, and Performance of Audit Firms: Consideration of Market Segments and Business Strategies

Academic journal article The International Journal of Business and Finance Research

Service Quality, Size, and Performance of Audit Firms: Consideration of Market Segments and Business Strategies

Article excerpt

ABSTRACT

This study investigates the relative importance between service quality and firm size in the performance determinants of audit firms under different market segments and business strategies. This study extracts a human capital-based service quality by the principal component analysis technique. In terms of market segment, total samples are divided into national, regional, and local audit firms. Further, based on the business strategies audit firms take, regional and local firms are classified into two categories: stability and expansion type firms. Empirical results indicate that service quality is a more important performance determinant than firm size in the national firms. However, firm size is more important in the regional and local firms. Next, operating performance of expansion regional firms is better than that of stability regional firms. The extent of performance effects of service quality and firm size differs between audit firms taking varied business strategies.

JEL: M42

KEYWORDS: Service Quality, Firm Size, Performance, Market Segment, Business Strategy

INTRODUCTION

In the aftermath of Enron and other major financial reporting scandals, the US Congress passed the Sarbanes-Oxley Act of 2002. The Act established the Public Company Accounting Oversight Board (PCAOB) to oversee the auditors of public companies. The PCAOB establishes auditing and quality control standards for public company audits, and performs inspections of the quality controls at audit firms performing those audits. Through regular inspections, the PCAOB evaluates the quality of auditing tasks on a specific engagement and reviews the practices of auditors, operating policies, and auditing procedures related to audit quality. In addition, PCAOB inspections focus on the assessment of the professional competency of auditors, the assignment of responsibility, and continuing professional education programs. These inspections are a clear indication that human resource management is an important determinant of service quality in audit firms.

Audit firms are typically a professional service organization, a labour and expertise-intensive industry. To investigate the service quality from inside of audit firms appears warranted. Human capital, especially the auditors' technical competencies, plays a key role in the determination of service quality. The technical competencies refer to auditors' experience, education, professionalism, employment history, and organization structure of audit firms (Deis and Giroux, 1992). Prior studies document the existence of market segmentation in auditing industry (DeFond, Francis and Wong, 2000; Ghosh and Lustgaten, 2006). Audit firms in different market segments are regulated differently. Under the varied regulation environment, audit firms take different responding mechanisms to enhance their operating performance. Prior studies note that both audit quality and audit fees are higher in a stricter legal liability regime (Venkataraman, Weber and Willenborg, 2008). In other words, audit firms in different market segments have different performance determinants. In addition to the service quality, audit firm size is a critical performance deteiminant identified by prior studies (Collins-Dodd, Gordon and Smart, 2004; Chen, Chang and Lee, 2008). Whether the performance determinants differ for audit firms in different market segments and under varied legal liability regime? To investigate the relative importance between service quality and firm size in the performance determinants of audit firms frames our first purpose. In order to satisfy diverse demands of customers, audit firms need different professional skill and expertise to provide different services, resulting in varied business strategies taken by audit firms. What are the effects of different business strategies on operating performance? Our next purpose is to investigate the differences in performance and in relative importance between service quality and firm size in the performance determinants for audit firms taking different business strategies. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.