Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

Contents lists available at ScienceDirect

Journal of International Accounting,

Auditing and Taxation

Audit pricing and auditor industry specialization in an emerging

market: Evidence from China
Kun Wang , Sewon O, Zahid Iqbal
Department of Accounting & Finance, Texas Southern University, Houston, Texas 77004, United States

a r t i c l e

i n f o

Keywords:
Audit fee
Big 4 rms
Industry specialization
Emerging market

a b s t r a c t
In this paper we examine the determinants of audit fees by focusing on auditor industry
specialization and second tier auditors in the Chinese market. We nd evidence of Big
4 premiums for brand name as well as industry specialization in both the statutory and
supplementary market. Big 4 industry specialists earn additional premiums in the statutory
market as compared to non-industry specialists. We also nd that market expansion did
not provide the second tier auditors any price advantage. These auditors increased their
market share mainly in the mid- and small-sized clienteles. Moreover, industry experience
developed by the second tier rms may have helped them gain economy of scale and reduce
service fees. This may be their strategy to win future clients that seek low-priced audits.
Published by Elsevier Inc.

1. Introduction
Audit pricing and its association with market competitiveness and auditor industry specialization is of primary interest
to regulators and users of nancial statements (DeFond, Francis, & Wong, 2000; Ferguson, Francis, & Stokes, 2003; Mayhew &
Wilkins, 2003). Much of the research to date has focused on developed economies, e.g., U.S., Australia, Canada, and Hong Kong.
Evidence on audit pricing is scarce for developing countries, including China, which is potentially one of the worlds largest
audit markets. The purpose of this study is two-fold. First, we examine whether audit pricing in China can be explained by
conventional variables as well as variables specic to the Chinese audit market. Second, we explore whether auditor industry
specialization exists, and to what extent such industry specialization affects audit fees in the Chinese setting.
The audit market in China is different from that of developed countries in several ways. First, competition among auditors
is more pronounced in China due to active participation of small- and mid-sized CPA rms and low concentration of Big 4
auditors (Li, Song, & Wong, 2005; Wang & Claiborne, 2008). Consequently, oligopolistic pricing of auditing services is either
absent or minimal in China. Second, Chinese auditors usually operate only in the local market due to stronger geographical
inuences in selection of audit rms. Thus, it is not essential that the rm-wide expertise be separated from the ofcelevel expertise when examining audit fees in China, a problem that has been encountered by prior studies on developed
countries.1 Finally, consulting fees, which account for only a small portion of audit rms revenue in China, will not be likely
to contaminate data used in our audit pricing models.

Corresponding author. Tel.: +1 713 313 7710; fax: +1 713 3137722.

E-mail addresses: wangk@tsu.edu (K. Wang), sewono@tsu.edu (S. O), iqbal zx@tsu.edu (Z. Iqbal).
1 Prior studies provide inconclusive results on the effect of auditor industry specialization on audit fees. For example, Craswell, Francis, & Taylor (1995)
found audit fee premium for industry specialized auditors in Australia in 1987, but Ferguson and Stokes (2002) found no such fee premium in 1998. In light
of these mixed ndings, Ferguson et al. (2003) studied auditors rm-wide and ofce-level industry specialization in Australia. They found that the market
perception and pricing of industry expertise in Australia is primarily based on ofce-level industry leadership in city-specic audit markets rather than
nation-wide expertise. These results explain the mixed evidence on the impact of auditors industry expertise on audit pricing.
1061-9518/$ see front matter. Published by Elsevier Inc.
doi:10.1016/j.intaccaudtax.2008.12.006

K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

61

Our study contributes to the literature on audit pricing in an emerging economy such as China in two important respects.
First, our empirical tests use data from 2005 and 2006, capturing the effects of regulatory and institutional changes that have
been undertaken in Chinas audit market since early 2000s. For example, further privatization of state-owned enterprises
and more overseas listings of Chinese rms are fostering both the supply of and demand for high quality auditors. This
result is in contrast to the evidence offered by two prior studies that the Chinese market was characterized by a lack of
demand for quality audit services from controlling shareholders and managers (Chen, Su, & Wu, 2007; DeFond, Wong, & Li,
2000). These studies used data before 2003. In addition to the Big 4 audit rms, second tier international auditors, including
Horwath International Inc. and BDO, have gained market share through mergers and partnerships with local CPA rms in
this period (Wang et al., 2008). Therefore, further investigation of audit pricing in this new segmented audit market in China
is warranted. Two prior studies reported inconsistent results on the association between auditor size and audit pricing in
China (Chen et al., 2007; Li et al., 2005).
Second, and more importantly, our study examines audit pricing by focusing on auditor industry specialization in the
Chinese market. Prior studies (e.g., Chen et al., 2007) assumed that Chinese CPAs have not developed any clear auditor
industry expertise and thus ignored the role of auditor industry specialization in audit pricing. This assumption is weak as
evidenced by the recent restructuring and marketing efforts around industry specializations by audit rms in China. The
business focus on industry expertise is especially apparent for the Big 4 rms from the way they promote themselves on
their web pages. For example, the KPMG website states:
At KPMG, we understand that each industry has its own issues, opportunities and special challenges. Through education, industry-focused training, and years of rst-hand experience, our professionals have gained an in-depth
understanding of a range of key industries and the issues faced by each.
The KPMG website goes on to list six broad industry specializations: consumer markets, nancial services, industrial
markets, information, communications and entertainment, property and infrastructure, and private equity. Industry focus is
also evident in the reorganization of Chinese local CPA rms in an effort to achieve competitive advantage over foreign rms
(Peoples Daily, 2006). Furthermore, Chinese regulators are also encouraging Chinese CPA rms to diversify their services
and develop a multi-layer industry structure. These developments in industry experiences will have a profound impact not
only on the Chinese audit market, but on the U.S. and global markets. Our study is, therefore, expected to shed light on the
development of industry specialization in a rapidly growing audit market in China. To our knowledge, no study has examined
the relation between industry specialization and audit fee in a developing economy such as China where competition among
the auditors is relatively high.
We examine determinants of audit pricing relevant in developed markets as well as in transitional Chinese market. Our
results indicate Big 4 auditors earn fee premiums for general brand name and industry specialization in both the statutory
and supplementary audit market. We also nd audit fees charged by Big 4 industry specialists are 139% higher than those of
non-specialists in the more competitive statutory market. These ndings represent signicant changes from earlier studies
that report Big 4 rms only earn fee premiums in the less competitive supplementary market (Chen et al., 2007). It also
implies auditor reputation is gaining increasing importance in Chinas nancial market as an effective mechanism to reduce
agency cost and signal rm value.
In addition, second tier international auditors (i.e., Horwath International Inc. and BDO) do not earn price premiums for
either general brand name or industry specialization despite their increased market share in mid- and small-sized clienteles.
This may be an indication that second tier auditors increase their market share as a basis for production economies of scale
which in turn, results in lower fees than other non-Big 4 rms. Another explanation for the increased market share is that
these rms take smaller prot margins or cut corners on the audit. Consistent with DeFond, Francis, et al. (2000) and DeFond,
Wong, et al. (2000), our overall results suggest that the Big 4 industry specialization premium is not due simply to industry
specialization, but is in fact conditional on specialist accounting rms already having Big 4 brand name cachet.
Our study is of primary interest to regulators and nancial statement users who are concerned with the market concentration of large auditors and audit quality in developing audit markets. Our results will also help audit rms price their
services according to the different characteristics of their clients. This result is especially true for the Big 4 auditors that are
leveraging heavily on the fast growing markets in China. Lastly, companies will benet from our study in assessing the costs
and benets of selecting audit rms.
The remainder of the paper is structured as follows. The next section offers background information about the audit
market in China and reviews prior literature. Section 3 explains sample selection and data collection. Empirical results and
analysis are provided in Section 4. The nal section presents conclusions and limitations.
2. Background and prior literature
2.1. Background
Until the late 1970s, China operated a planned economic system under which an enterprise was either state-owned or
collectively owned. Both types of enterprise were run directly by the government, with little room for market mechanisms.
As such, there was no need for independent accounting and auditing until the early 1980s when the economic reform and
opening of the economy were adopted by the government. In the early stage of reform, Chinas audit rms were only allowed

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K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

to serve business entities with a foreign afliation. The emergence of direct nancing for the state-owned enterprises in
the form of share issuance to domestic individual investors in the mid-1980s, however, led to an emerging demand for
independent audit information. Partially in response to such a need, the Chinese Institute of Certied Public Accountants
(CICPA) was established in 1989, and the Shanghai Stock Exchange and Shenzhen Stock Exchange were established in 1990 and
1991, respectively. The two markets have expanded steadily and provide direct incentives and pressures for market-oriented
nancial disclosure.2
The second major change in Chinas audit market resulted from the issuance of publicly traded shares to foreign investors
and the rapid growth since 1992 of foreign-invested enterprises in the economy. In response to the information needs of
foreign investors, the demand for high quality audits has increased dramatically from that time. As a result, foreign accounting
rms were allowed to establish joint ventures with local practitioners to perform nancial statement audits. Until the end of
1999, there were three types of audit rms in China: government-sponsored audit rms, university-sponsored audit rms,
and auditors in joint venture with overseas audit rms. A auditor rm of a region (especially relevant to government- and
university-sponsored auditors) usually has strong and close links with the local government and businesses of that region. In
order to facilitate the economic reform and introduce market mechanism in the audit market, the Ministry of Finance (MOF)
requested all government- and university-sponsored audit rms to disafliate from their sponsors starting from year 2000.
From that time, all audit rms operated independently as partnerships or limited corporations. At the end of February 2007,
there were 1446 accounting/auditing rms across the country.3
Chinas publicly listed rms are the most sought-after clients of Chinas audit rms. Most listed rms are former SOEs
with the government (both central and local) holding a certain percentage of shares. This market is not, however, open to all
audit rms. The MOF and China Securities Regulatory Commission (CSRC) require that listed rms be audited by specially
designated audit rms,4 which is a unique feature of the Chinese audit market. By the end of March 2007, only 73 CPA rms
were qualied to audit publicly traded rms.5
Publicly listed companies that issue only domestic shares (A-shares) are required to undertake a statutory audit by
any qualied audit rms in accordance with Chinese GAAP. The B-share companies with foreign investments are required
to undergo a supplementary audit that follows the International Financial Reporting Standards (IFRS), in addition to the
statutory audit.6 The statutory audit market has low entrance barriers and is highly competitive, while the supplementary
market is dominated by the Big 4 rms because of Chinas regulatory preference for large foreign auditors. The different
nature of these two audit markets in China provides a useful institutional setting for studying the developing strategy of
audit rms (especially the second-tier international auditors) and determinants of audit fees.

2.2. Research hypotheses

In contrast to the audit market in developed economies, Chinas audit market is competitive rather than oligopolistic (Li
et al., 2005; Wang et al., 2008). According to Li et al., during the period 20012003, the top 10 audit rms in China audited
only 30% of the listed rms, generated about 40% of their revenue and the top four audit rms in China audited only 14% of
the listed rms, generated about 27% of their revenue. In comparison, the audit markets for the publicly listed rms in the
U.S., U.K., Canada, and Hong Kong are dominated by the Big 8/5/4 rms. The big audit rms in these countries audited more
than 80% of the listed rms, which provided more than 97% of their revenue.
This relatively competitive nature of the Chinese audit market necessitates re-examination of the association between
auditor size and audit fee in the Chinese setting. Two prior studies have looked at this issue. For example, Li et al. (2005)
measured audit rm size using various continuous measures rather than dichotomous proxies (Big 4. vs. non-Big 4) and
examined the linear relationship between auditor size and audit quality (audit fees). Based on data from all publicly listed
companies from 2001 to 2003, their test results showed larger audit rms are likely to issue modied opinions, suggesting
that large rms tend to maintain their reputations in a competitive environment. For size effects on audit fees, they found
larger audit rms are more likely to charge signicantly higher fees. This result is likely to be due to higher audit quality
rather than economic rents created by monopolistic market power because audit rms are unlikely to exert substantial
monopolistic power in a relatively competitive market.

2 Currently, two types of shares are listed on the domestic exchanges: A- and B-share. A-share listings are offered only to domestic investors and are
transacted in Chinese currency (RMB). B-share listings are offered, primarily, to foreign investors and transacted in U.S. dollars (Shanghai) or Hong Kong
dollars (Shenzhen). Until 2001, B-shares were only offered to foreign investors. Approximately 20% of A-share rms are also authorized to issue B-shares.
Since its inception in 1991, the B-share market has attracted a considerable number of foreign investors. By the end of November 2006, there were 110
issuers of B-shares with a total market capitalization of US $148.4 billion.
3 CICPA news release on February 12, 2007.
4 According to the most recent regulation released by Ministry of Finance (MOF) on June 10, 2000, a qualied rm has to be established for at least 3
years, with capital of no less than RMB 2 millions for a limited liability rm and RMB 1 million for partnerships. The rm also needs to employ at least 20
CPAs who are qualied to audit public rms and at least 40 CPAs under age 60. Furthermore, it must show a sales record of at least RMB 8 million in the
previous year and no violation of law in the previous 3 years.
5 CSRC news release on March 23, 2007.
6 MOF and CSRC required all of the publicly listed companies in China to prepare their annual reports in accordance with IFRS from January 2007.

K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

63

On the other hand, a recent study by Chen et al. (2007) on the 20002003 Chinese B-share market argues the fee premium
charged by large auditors is jointly determined by their reputation and market power. Which of the two factors has a greater
inuence in determining audit fees depends on the market demand for audit quality and the competitiveness of the market.
For example, in Chinas statutory audit market where competition is ercely high and the demand for audit quality is low,
large auditors do not have an advantage from their high quality service. Rather, they need to compete on price with other
audit rms to retain clients. Consistent with their predictions, Chen et al. (2007) found that the Big 5 rms earn signicant
fee premium in the less competitive supplementary market but not in the competitive statutory market. They conclude that
audit fee premium earned by the Big 5 rms in China is more likely related to their dominance than reputation in the audit
market.
The mixed results from the two prior studies are likely due to different samples and research designs. Our data includes
B-share companies similar to those used by Chen et al. (2007) but focuses on more recent reporting periods (i.e., years 2005
and 2006). Table 1 provides market shares of our sample audit rms. Panel A shows that the market share of Big 4 rms
ranges from 20 to 35% based on number of clients, and Panel B shows a 4568% market share of Big 4 rms based on clients
total assets audited. This result conrms the Chinese audit market is competitive rather than oligopolistic (Li et al., 2005). It
also implies Big 4 rms service larger companies as compared to other auditors.
Notably, our data in Table 1 shows a steady increase of Big 4 market share in the statutory market as compared to
their average market shares (26.8%) reported in Chen et al. (2007). We interpret this trend as that Big 4 rms are gaining
popularity because further privatization of stated owned enterprises and more overseas listings of Chinese rms are fostering
the demand for high quality auditors even in the statutory market (Sun & Tobin, 2005). The increased market share, in turn,
may deliver pricing advantages to Big 4 auditors when companies are willing to pay higher fees. Therefore, we expect the
insignicant association between auditor size and audit fee in the statutory market documented in Chen et al. (2007) will
cease or reverse for our testing period, and our rst set of hypotheses predicts:
H1a.

Big 4 audit rms are associated with fee premiums in the statutory audit market.

H1b.

Big 4 audit rms are associated with fee premiums in the supplementary audit market.

An interesting phenomenon in Chinas audit market is the expansion of the second tier international auditors as a result
of mergers and partnerships with Chinese local CPA rms. For example, Horwath International Inc. (Horwath) has partnered
with seven local rms since 2001, including Shanghai Shulun Pan CPAs, one of the largest local CPA rms in China. By
capturing the market shares of its new partners, Horwath became the largest audit rm measured by the number of clients
in the B-share market and audits more than 20% of all of the public companies listed on Stock Exchanges in China. Therefore,
the role of the second tier auditors in China is an important market force that cannot be omitted in an audit fee study.
Due to the small market share of non-Big 4 audit rms in the developed market, there is a dearth of evidence on the link
between the reputation of second tier auditors and their fee levels. The impact of change in market position of second tier
auditors on their pricing strategy, therefore, remains an empirical question to be explored in the Chinese setting. Following
the argument of Chen et al. (2007) that audit pricing is driven mostly by the market dominance in the statutory audit market,
we expect that second tier auditors may derive some fee advantage from their increased market power. However, this fee
advantage accrued from expanded market share may not be sustained in the supplementary market where brand name and
audit quality are the primary determinants of fee levels (i.e., fee premiums are related only to Big 4 reputation). Based on
these speculations, we state our second set of hypotheses as follows:
H2a.

Second tier audit rms are associated with fee premiums in the statutory audit market.

H2b.

Second tier audit rms are not associated with fee premiums in the supplementary audit market.

Another recent change in the market strategy of audit rms in China involves the emphasis on development of industry
specialization. In the western market, claims by Big 4 audit rms of increased or increasing levels of industry specialization
imply that rms perceive a net benet to specialization regardless of whether the benets come from increased market share,
prots, audit quality, or audit fees (Hogan & Jeter, 1999). On one hand, audit rms acquire a reputation as industry specialists
by developing industry-specic skills and expertise over and above normal auditor expertise. To the extent that Big 4/5/6
rms invest in industry specialization, they require a return on this investment and, ceteris paribus, would be expected to
charge higher fees compared to non-specialists for audits in the related industries.
On the other hand, audit rms develop industry specialization by increasing their clienteles. As a result, specialists
could also achieve production economies of scale and become more efcient, lower-cost producers of audits. Under these
circumstances, the specialist audit rms would presumably earn a prot premium (due to their lower marginal costs).
However, because only fees not costs are observable, empirical models could show that industry specialization results
in lower fees. To date, the empirical ndings from the U.S. market indicate that audit fee and industry specialization are
positively related, while the ndings from the Australian market are mixed (Craswell, Francis, & Taylor, 1995; Mayhew &
Wilkins, 2003; Palmrose, 1986; Ward, Elder, & Kattelus, 1994).
In the Chinese market, industry specialization can have different implications for the pricing strategy of Big 4 rms and
second tier auditors. As shown in Table 1, second tier rms leveraged more on mid- and small-sized clients in the expansion
of their market share and development of industry expertise. These companies are not very protable and are more likely to
be a clientele that simply demands the lowest-priced audit available. Therefore, we expect the benets derived from product

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Table 1
Audit rm market share in Chinese B-Share market in 2005 and 2006.
2006

The statutory audit market

Panel A: audit rm market share based on number of clients
Ernst & Young
5
Deloitte & Touche
8
KPMG Peat Marwick
2
Price Waterhouse Coopers
11
Total Big 4 rms
26
BDO
Horwath
Total second tier rms
Other CPA rms
Total sample

The supplementary audit market

4.59
4.59
5.50
20.18
34.86

6
4
2
10
22

5.71
3.81
1.90
9.52
20.94

4
4
4
21
33

3.81
3.81
3.81
20.00
31.43

18
26
44

16.51
23.85
40.36

17
24
41

15.60
22.02
37.62

21
24
45

20.00
22.86
42.86

21
22
43

20.00
22.95
42.95

34
109a

31.20
100.00

22
109

20.18
100.00

34
105a

32.38
100.00

22
105

20.95
100.00

2006
The supplementary audit market %

The statutory audit market %

The supplementary audit market %

6.25
7.75
15.47
34.63
64.10

2.54
16.52
13.23
17.27
49.56

3.88
7.76
18.38
38.11
68.13

11.59
15.08
26.67

10.41
12.23
22.64

10.50
11.04
21.54

9.55
7.38
16.93

28.76
100.00

13.26
100.00

28.90
100.00

14.94
100.00

Panel B: audit rm market share based on clients total assets audited

Ernst & Young
5.52
Deloitte & Touche
15.92
KPMG Peat Marwick
9.63
Price Waterhouse Coopers
13.50
Total Big 4 rms
44.57

The supplementary audit market

5
5
6
22
38

The statutory audit market %

Other CPA rms

Total sample

4.59
7.34
3.67
10.09
25.69

2005

BDO
Horwath
Total second tier rms

The statutory audit market

The numbers are different from the total sample due to missing auditor data.

K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

2005

K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

65

Table 2
Industry representation of the sample rms.
Industry description

Number of rms

Agriculture
Chemicals and allied products
Conglomerates
Construction
Electronics
Food and beverages
Industrial and commercial machinery
IT
Mining and metal productions
Paper and printing
Pharmaceuticals
Real estate
Social services
Textiles & apparel
Transportation
Utilities
Wholesale and retail
Total sample B-share rms

% of the sample

4
5
4
3
19
8
65
7
14
4
5
16
10
18
15
8
8

1.88
2.35
1.88
1.41
8.92
3.76
30.52
3.29
6.57
1.88
2.35
7.51
4.69
8.45
7.04
3.76
3.76

213

100.00

economies will enable industry specialized second tier rms to lower audit fees in recruiting and retaining clients. As an
additional support for our expectation, DeFond, Francis, et al. (2000) and DeFond, Wong, et al. (2000) found a local audit
rm that specialized in the property industry actually charged 31% lower fees than other local non-Big 6 rms in Hong Kong.
Our third set of hypotheses predicts:
H3a.

Industry specialized second tier audit rms are not associated with fee premiums in the statutory audit market.

H3b. Industry specialized second tier audit rms are not associated with fee premiums in the supplementary audit market.
The primary aim of Big 4 audit rms that already have brand name in place is to develop industry expertise by offering
differential service quality rather than lower audit cost. Prior evidence in the Hong Kong market indicates that Big 4 industry
specialists earn a premium of 29% over Big 6 non-specialists (DeFond, Francis, et al., 2000; DeFond, Wong, et al., 2000).
Moreover, in the Chinese setting, market share of Big 4 rms resides in the largest companies that are more protable and
willing to pay higher fees for differentiated audit services. Therefore, we expect Big 4 auditors will charge higher prices to
compensate their investment on industry specialization in both the statutory and supplementary audit market, and our last
set of hypotheses states:
H4a.

Industry specialized Big 4 audit rms are associated with fee premiums in the statutory audit market.

H4b.

Industry specialized Big 4 audit rms are associated with fee premiums in the supplementary audit market.

3. Sample and research design

3.1. Sample
Our sample includes all 109 Chinese listed companies that issued both A- and B-shares in years 2005 and 2006. We hand
collected audit fee and nancial data from each companys annual report published by the Shanghai and Shenzhen Stock
Exchanges. The data for total audit fee are available for 213 rm years of which 107 rm years belong to the statutory audit
market and 106 rm years belong to the supplementary audit market. The industry breakdown of our sample is reported in
Table 2. In the sample, 30.52% are industrial and commercial machinery rms, 8.92% are electronics rms, 8.45% are textile
and apparel rms, and 7.04% are transportation rms. The remaining 45.07% of the sample is from 14 other sectors.
3.2. Research design
Using a standard audit fee model (Chen et al., 2007; Craswell & Francis, 1999; Mayhew & Wilkins, 2003), we examine the
determinants of audit pricing after controlling for the effects of client size, audit complexity, and auditorclient risk sharing.
To test for differential audit pricing based on our hypotheses, experimental variables for Big 4 rms, second tier auditors,
and industry specialists are added to the audit fee model. We estimate the OLS regression model as follows:
AUDFEE = b0 + b1 ASSETS + b2 INVREC + b3 SUB + b4 LOSS + b5 OPINION + b6 TENURE
+ b7 FOREIGNSH + b8 FL CONTROL + b9 BIG4 + e

(1)

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K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

AUDFEE = b0 + b1 ASSETS + b2 INVREC + b3 SUB + b4 LOSS + b5 OPINION + b6 TENURE

+ b7 FOREIGNSH + b8 FL CONTROL + b9 BIG4TIER2 + e

(2)

AUDFEE = b0 + b1 ASSETS + b2 INVREC + b3 SUB + b4 LOSS + b5 OPINION + b6 TENURE

+ b7 FOREIGNSH + b8 FL CONTROL + b9 TIER2 + b10 BIG4 + e

(3)

AUDFEE = b0 + b1 ASSETS + b2 INVREC + b3 SUB + b4 LOSS + b5 OPINION + b6 TENURE + b7 FOREIGNSH

+ b8 FL CONTROL + b9 TIER2NSPEC + b10 TIER2SPEC + b11 BIG4NSPEC + b12 BIG4SPEC + e

(4)

where AUDFEE = natural log of total audit fee; ASSETS = natural log of total assets; INVREC = (accounts receivables + inventory)/total assets; SUB = square root of number of consolidated subsidiaries; LOSS = indicator variable (1 if loss
reported in current year, 0 otherwise); OPINION = indicator variable (1 if modied opinion, 0 otherwise); TENURE = natural
log of auditors tenure in years; FOREIGNSH = percentage of B-shares (i.e., foreign shares); FL CONTROL = shares of top 10
foreign shareholders/Shares of the largest shareholder; BIG4 = indicator variable (1 if a Big 4 audit rm is used, 0 otherwise);
BIG4TIER2 = indicator variable (1 if the auditor is a Big 4 rm or BDO or Horwath, 0 otherwise); TIER2 = indicator variable
(1 if the second tier auditor is BDO or Horwath, 0 otherwise); TIER2NSPEC = indicator variable (1 if the Tier 2 rm is not an
industry specialist, 0 otherwise); TIER2SPEC = indicator variable (1 if the Tier 2 rm is an industry specialist, 0 otherwise);
BIG4NSPEC = indicator variable (1 if the Big 4 rm is not an industry specialist, 0 otherwise); BIG4SPEC = indicator variable
(1 if the Big 4 rm is an industry specialist, 0 otherwise); e = error term with a normal distribution.
Model (1), which tests H1, will provide a baseline comparison with the results of other studies and document whether
the Chinese audit market pays a premium to the Big 4 auditors. Models (2) and (3) are used to test H2 and examine whether
second tier auditors (namely BDO and Horwath) can earn a fee premium due to recent expansion of their market share. To
separate the effect of auditor industry specialization from auditors general brand name, we construct model (4) to examine
H3 and H4. Specically, in model (4), we include indicator variables of industry specialists for both second tier and Big 4
audit rms.
With respect to the control variables, ASSETS is a proxy for client size, INVREC is a proxy for audit risk, and SUB is a proxy for
audit complexity. We expect positive relationships between audit fee and client size, audit risk, and audit complexity since
higher values of these variables increase the workload and riskiness of the audit work. LOSS is a proxy for rm protability
and audit rms would require higher fees if the company suffered losses. The association between audit fee and OPINION
is inconclusive in the developed audit market (Craswell et al., 1995; Craswell & Francis, 1999). In the Chinese setting, we
predict a negative coefcient on OPINION because Chen et al. (2007) found companies receiving modied opinions tend to
be smaller, poor nancial performers, and unable to pay higher fees.
We are unclear about the sign of TENURE because prior literature recognizes two opposing effects on audit fees from
auditor tenure. On one hand, auditors with longer tenure tend to extract higher fees (i.e., future quasi-rents) from clients to
recover losses incurred due to low-balling. On the other hand, longer tenure enhances auditors understanding of the clients,
enabling auditors to design efcient audit procedures and enjoy cost savings.
Finally, FOREIGNSH and FL-CONTROL are two control variables developed by Chen et al. (2007) in the emerging Chinese B-Share market. FOREIGNSH controls for the possibility that foreign investors may have a greater demand for quality
audits, and we expect a positive relation between audit fee and FOREIGNSH. FL-CONTROL captures differences in agency
costs in terms of the relative monitoring power of foreign investors over the largest shareholders that could affect the
audit fee. Increased monitoring power on the part of foreign investors is expected to reduce agency costs and reduce audit
fees.
3.3. Summary statistics
Table 3 presents descriptive statistics for the Chinese B-share rms that have audit fee data available for the statutory
and supplementary audit markets (213 rm years in total). In the statutory and supplementary audit markets, the mean and
median total assets (ASSETS) are RMB 5021 (5066) million and RMB 2605 (2636) million, respectively. The mean and median
total audit fee (AUDFEE) charged by the audit rms in these two markets are RMB 703.8 (668.34) thousand and RMB 550
(512.5) thousand, respectively. The data also show that accounts receivables and inventory (INVREC) are about 24% of total
assets and that sample rms have, on average, 14 consolidated subsidiaries (SUB). As indicated by LOSS, about 16% of the rms
experienced nancial loss. During the sample period, 15% of their companies received modied opinions (OPINION), and the
tenure period for engaged auditors (TENURE) is roughly 6.5 (5.5) years in the statutory (supplementary) market. Finally, total
shares owned by foreign investors are roughly 35% (FOREIGNSH), and total shares held by top 10 foreign investors are around
43% of the shares owned by the largest shareholder (FL-CONTROL).
In Table 3, we also present data on audit fees for ve levels of auditor quality in the statutory and supplementary audit
markets. At the lowest quality level, rms use non-Big 4 and non-second tier auditors; at the second quality level, rms use
second tier non-industry specialized auditors; at the third level, rms use second tier industry specialist auditors; at the
fourth level, rms use Big 4 auditors who are not industry specialists; and at the top quality level, rms use the Big 4 auditors

Table 3
Summary statistics for the audit fee model.
Total sample
(N = 107)
Mean
Panel A: the statutory audit market
AUDFEE (000)
703.80
ASSETS (000)
5,021,062
INVREC
0.24
SUB
13.82
LOSS
0.16
OPINION
0.15
TENURE
6.55
FOREIGNSH %
35.51
FL CONTROL %
43.00
BIG4
0.16
TIER2
0.38
Variables

Non-Big 4 auditors
(N = 49)

Tier 2 non-industry
specialists (N = 34)

Tier 2 industry
specialists (N = 7)

Big 4 non-industry
specialists (N = 6)

Big 4 industry
specialists (N = 11)

Median

Mean

Mean

Mean

Mean

Mean

550.00
2,605,366
0.18
9.00
0.00
0.00
5.50
34.62
9.00
0.00
0.00

503.47
4,174,086.90
0.22
9.80
0.14
0.22
6.15
35.69
43.00
0.00
0.00

553.47
2,774,148.12
0.27
14.44
0.29
0.11
6.85
36.56
39.00
0.00
1.00

522.57
2,887,624.57
0.16
12.43
0.00
0.00
7.42
34.21
29.00
0.00
1.00

979.64
6,040,861.45
0.32
13.64
0.00
0.00
8.09
35.93
48.00
1.00
0.00

2,835.17
25,149,759.67
0.19
43.67
0.00
0.00
4.00
28.86
66.00
1.00
0.00

Non-Big 4 auditors
(N = 31)

Tier 2 non-industry
specialists (N = 29)

Tier 2 industry
specialists (N = 5)

Big 4 non-industry
specialists (N = 16)

Big 4 industry
specialists (N = 25)

Median

Mean

Mean

Mean

Mean

Mean

512.50
635,761.00
0.19
9.00
0.00
0.00
5.00
34.33
8.00
0.00
0.00

384.42
2,109,536.55
0.23
7.87
0.23
0.29
3.10
33.81
50.00
0.00
0.00

449.41
2,045,164.62
0.29
14.14
0.28
0.17
3.76
37.70
31.00
0.00
1.00

448.00
2,221,262.00
0.18
12.00
0.00
0.00
4.20
36.73
32.00
0.00
1.00

867.73
5,342,251.06
0.30
10.88
0.00
0.00
7.87
36.97
45.00
1.00
0.00

1,190.82
12,942,879.54
0.17
23.50
0.00
0.00
9.54
32.80
65.00
1.00
0.00

Total sample
(N = 106)
Mean

Panel B: the supplementary audit market

AUDFEE (000)
668.34
ASSETS (000)
5,065,874.712
INVREC
0.24
SUB
13.89
LOSS
0.16
OPINION
0.14
TENURE
5.53
FOREIGNSH %
35.27
FL CONTROL %
42.00
BIG4
0.39
TIER2
0.32

K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

Variables

67

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K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

Table 4
Audit rm industry specialization in the Chinese B-share market.
Audit rms

The supplementary audit market

The statutory audit market

Industries

Industries

Mean audit market share %

Mean audit market share %

Ernst & Young

Information technology

30

Information technology

30

Deloitte & Touche

Papers and printing

Social services

88.62
49.75

Metals and non-metals

Social services
Papers and printing
Utilities

40.3
49.75
88.62
46.69

KPMG Peat Marwick

Electronics
Metals and non-metals
Real estate

42.51
40.3
50.56

Real estate
Electronics

50.56
37.89

Price Waterhouse Coopers

Social services
Machinery
Textiles & apparel
Food and beverages
Transportation
Utilities
Wholesale and retail

33.83
52.64
65.51
47.76
61.21
86.19
73.58

Food and beverages

Textiles & apparel
Machinery
Social services

47.76
44.29
42.56
33.83

BDO

Agriculture
Conglomerates
Pharmaceuticals

51.7
67.76
55.18

Food and beverages

Pharmaceuticals
Conglomerates

33.79
55.18
67.76

Horwath

Pharmaceuticals
Construction
Information technology

44.53
71.67
61.46

Agriculture
Mining
Pharmaceuticals
Construction
Information technology
Petrochemicals

48.3
80.44
44.53
71.67
61.46
53.94

who are industry specialists. Our industry specialization measure is derived from prior studies (Casterella, Francis, Lewis,
& Walker, 2004; DeFond, Francis, et al., 2000; DeFond, Wong, et al., 2000; Ferguson et al., 2003), capturing audit rms that
have more than 30% of the market share in each industry (two-digit SIC codes).7 Each auditors market share is based on the
clients total assets.8
For second tier audit rms, we do not nd signicant differences in client size and audit fees between industry specialized
auditors and non-industry specialists based on mean and median values (only mean values are reported). Compared to rms
hiring local CPA rms, second tier audit rms actually have smaller clients and charge lower audit fees. These results suggest
second tier auditors rely on small- and mid-sized clients to expand their market, and their motivation to develop industry
expertise is to lower rather than increase price.
The data on the levels of auditor quality for Big 4 rms, however, indicate that the Big 4 audit rms have more engaged
clients in the supplementary audit market than in the statutory market (41 = 16 + 25 vs. 17 = 6 + 11). Also, in both markets,
industry specialized Big 4 auditors are associated with the largest clients. Moreover, audit fee at least on a univariate basis
is signicantly higher for auditors that specialize in industries than for auditors that are in the other levels (i.e., Big 4
auditors that do not specialize and non-Big 4 auditors). These ndings are generally consistent with previous research that
documents industry specialized Big 4 rms provide differentiated service to their clients and, as a result, earn fee premiums
(Mayhew & Wilkins, 2003).
Further in Table 4, we report audit rms that are dened as industry specialists that have at least 30% market share in
their respective industries. The results indicate that Price Waterhouse Coopers has broader industry experience than the
other Big 4 auditors in the statutory and supplementary market, followed by Horwath and Deloitte & Touche.

7 To measure audit rm specialization based on total assets, we use the method employed by Hogan and Jeter (1999). In particular, each audit rms
market share is calculated, per year, as the sum of the square root of assets of all rms that it audited in a given two-digit SIC code divided by the sum of
the square root of assets across all COMPUSTAT rms in the same two-digit SIC code. The following equation describes the measure:

MSik =

Jik 
Aijk
j=1
Ik Jik 
i=1

j=1

Aijk

where i = an index of audit rms; j = an index of client rms; k = an index of client industries; Ik = number of audit rms in industry k; and Jik = the number
of clients served by audit rm i industry k.
The IPO literature has adopted the use of square root of the assets as a better measure of auditor industry concentration than the untransformed measure.
8 Following prior studies (Ferguson et al., 2003; Mayhew & Wilkins, 2003), we tried using 10% and 20% thresholds to dene industry specialized auditors
based on their market share percentage. However, the distributions of audit fees and clients in the Chinese market make these criteria impractical. When
applied, these criteria result in over 80% of the clients in the ve largest industries being audited by the specialists.

K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

69

Table 5
Regression results for the statutory audit market.
Expected signs
F-statistics
Signicance
Adjusted R2
Independent variables*
Intercept

ASSETS

INVREC

SUB

LOSS

OPINION

TENURE

FOREIGNSH

FL-CONTROL

BIG4

BIG4TIER2

TIER2

TIER2NSPEC

TIER2SPEC

3.66
0.00
0.20

BIG4NSPEC
BIG4SPEC
*
**
***

Model (1)

3.02
2.23**
0.2
2.17**
0.000009
1.89***
0.01
0.20
0.41
1.45***
0.48
1.56***
0.05
0.44
0.01
0.90
0.04
0.21
0.71
2.45**

Model (2)
3.08
0.00
0.17
2.04
1.53***
0.28
3.11*
0.00001
2.40**
0.002
0.03
0.20
0.68
0.35
1.14
0.005
0.03
0.007
0.63
0.01
0.07

Model (3)
3.31
0.00
0.19
2.92
2.13**
0.21
2.21**
0.000009
1.90***
0.001
0.02
0.30
1.04
0.45
1.44***
0.04
0.35
0.01
0.91
0.03
0.16
0.78
2.50**

Model (4)
2.84
0.00
0.19
3.17
2.32**
0.17
1.78***
0.00001
2.54**
0.009
0.16
0.29
1.00
0.51
1.61***
0.08
0.64
0.01
1.10
0.06
0.28

0.29
1.40
0.14
0.62
0.17
0.73
0.04
0.10
0.64
1.83***
1.19
2.34**

Indicate signicance at the 0.01 level.

Indicate signicance at the 0.05 level.
Indicate signicance at the 0.10 level.

4. Empirical results and analysis

In this section, we present the multivariable test results for our hypotheses in the statutory audit market and the
supplementary market.
4.1. The statutory audit market
The regression results of the audit fee models for the statutory audit market are given in Table 5. The F-statistics are
signicant at p < 0.00 for models (1)(4), implying that the independent variables explain a signicant portion of the variance
in audit fee. The adjusted R2 s for these models range from 0.17 to 0.20. To examine potential multicollinearity in the regression
model, we regressed all the explanatory variables on AUDFEE. The results indicate that the variance ination factor (VIF) is
below 2.13 and tolerance levels are above 0.82 for all the explanatory variables. This result suggests that multicollinearity
between the explanatory variables is not likely to pose a serious problem in our interpretation of the regression results.
Turning to the individual models, model (1) is the test of H1a that estimates fee premium paid to the general reputation
of Big 4 rms. The results of this test provide a basic comparison with those of other studies and document whether the
Chinese audit market pays a premium to the Big 4 auditors in the statutory market. In model (1), the coefcient on BIG4 of
0.71 is statistically signicant (t = 2.45, p = 0.02), which indicates that the Big 4 rms earn a fee premium over the non-Big 4
rms when other variables are controlled. Because model (1) is linear in logarithms, the antilog of BIG4s coefcient minus
1 is the percentage effect on audit fees of choosing a Big 4 auditor (Mayhew & Wilkins, 2003). The 0.71 coefcient for BIG4
(natural log) translates into a 103% average fee premium for the Big 4 audit rms in the statutory market. Therefore, our
nding supports H1a but is inconsistent with Chen et al. (2007), who found insignicant audit fees charged by Big 4 rms.
Given the fact that Chen et al. use market data before 2003, the different ndings from our research are likely to represent
the market movement towards high quality audit rms despite the fact they charge higher prices.

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K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

We use models (2) and (3) to test H2a, an examination of fee premiums associated with second tier auditors due to recent
expansion of their market shares. In model (2), we create a new dummy variable (BIG4TIER2) by combining Horwath and
BDO with the Big 4 rms. The dummy variable (BIG4TIER2) has a value of 1 if the auditor is Horwath, BDO, or Big 4 rm, 0
otherwise. The results show that the coefcient of BIG4TIER2 (0.29) is positive but not signicant (t = 1.4, p = 0.17), indicating
that audit fees cannot be explained by this larger group of auditors. As a further test, we separate TIER2 and BIG4 in model
(3) along with other control variables. The results show that the TIER2 coefcient of 0.14 is not signicant (t = 0.62, p = 0.54),
but the coefcient of 0.78 for BIG4 is positive and signicant (t = 2.5, p = 0.01). In sum, these results do not support H2a,
suggesting that second tier CPA rms do not price their services signicantly higher than other local audit rms even with
increased number of clients in the relatively competitive statutory audit market.
Prior research argues that the Big 4 auditors earn fee premiums because clients value their general brand name as well
as differential service quality such as industry expertise. We use model (4) to test H3a and H4a in an attempt to separate
the effect of auditor industry specialization from the general brand name for Big 4 and second tier audit rms. We nd the
coefcients for TIER2NSPEC and TIER2SPEC are positive and negative, respectively, but both insignicant. This result indicates
second tier auditors do not earn higher fees due to industry specialized knowledge. Rather, industry specialization may give
them the advantage of product economies and lower audit costs so that they can reduce audit prices, an effective strategy
to attract and retain clients when competing with other local rms.9 Therefore, H3a is supported.
Turning to the Big 4 audit rms, we nd the coefcients on industry specialist variable (BIG4SPEC) and non-industry
specialist (BIG4NSPEC) are both positive and statistically signicant (p < 0.05 and p < 0.1, respectively), but the magnitude of
BIG4SPEC 1.19 is much larger that for the BIG4NSPEC (0.64). On average, this result translates to Big 4 industry specialists
having a premium of 228% and Big 4 non-specialists having a premium of 89% over non-Big 4 auditors. Thus, the overall
results support H4a and further indicate Big 4 rms with industry expertise can earn additional fee premiums from higher
service quality as compared to Big 4 rms equipped only with general brand reputation.
Among the control variables, the coefcient of ASSETS is positive and signicant in all four models, which is consistent with
the ndings on the rm sizeaudit fee relation documented in earlier studies (DeFond, Francis, et al., 2000; DeFond, Wong,
et al., 2000; Ferguson et al., 2003; Mayhew & Wilkins, 2003). The coefcient for INVREC is also positive and signicant in all
four models, suggesting that audit rms charge higher fees for clients who have higher inventory and accounts receivables.
The coefcient for LOSS is negative and signicant in model (1), indicating that audit rms lower their prices if the client
suffered a nancial loss in the audited period. A further comparison (not tabulated) of the loss companies and protable
companies reveals that companies incurring losses tend to be smaller, highly in debt, and unable to pay higher fees. Consistent
with prior ndings, OPINION is signicantly negative in all the models, suggesting audit fees are lower for rms receiving
modied opinions. However, we do not nd conclusive results on the number of subsidiaries (SUB) and auditors the tenure
periods (TENURE). Lastly, the signs on FOREIGNSH and FL-CONTROL are consistent with predictions (positive and negative,
respectively) but their magnitudes are not signicant. Overall, our ndings on the control variables are very close to those
reported in Chen et al. (2007).
4.2. The supplementary audit market
In Table 6, we report the test results for our hypotheses in the supplementary audit market. Models (1) through (4)
have adjusted R2 s between 0.40 and 0.43, suggesting that the explanatory power of the models in the supplementary audit
market is higher than that in the statutory audit market. For models (1)(3) that test H1b and H2b (i.e., auditors general
reputation), the overall results are similar to those ndings in the statutory market. That is, the coefcient for the Big
4 indicator variable is positive and statistically signicant, suggesting a fee premium is paid to the Big 4 auditors in the
supplementary market. In contrast, the insignicant coefcients for BIG4TIER2 and TIER2 indicate that second tier audit
rms do not earn higher audit fees in spite of their increased market share in the supplementary market. Thus, both H1b
and H2b are supported.
In model (4) where the industry expertise of the Big 4 and second tier audit rms is investigated, we nd second tier audit
rm do not earn higher audit fees regardless of their industry expertise. For the Big 4 audit rms, both industry specialists
and non-specialists are related to signicantly higher fees, but the difference between fee premiums earned by specialists
and non-specialists are not as pronounced as in the statutory market. This result implies that the general brand name of Big
4 rms is the primary attraction to clients in the supplementary market. Established industry expertise did not provide Big
4 audit rms additional power in negotiating price with clients. Therefore, H3b is rejected and H4b is supported.
Overall, our ndings from the statutory and supplementary audit markets suggest: (1) Big 4 audit rms earn fee premiums
from their general reputation in both the statutory and supplementary markets; (2) industry specialized Big 4 auditors earn
additional fee premiums in the statutory market but not in the supplementary market as compared to non-specialist Big
4 rms; (3) second tier auditors do not earn fee premiums either from reputation or industry specialization. The main
advantage they derive from market expansion and/or industry expertise is product economies of scale and lower audit
cost.

9 When collecting data from companies annual reports, we found that only a few auditors switched clients during our sample period and most switched
to save auditing costs.

K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

71

Table 6
Regression results for the supplementary audit market.
Expected signs
F-statistics
Signicance
Adjusted R2
Independent variables*
Intercept

ASSETS

INVREC

SUB

LOSS

OPINION

TENURE

FOREIGNSH

FL-CONTROL

BIG4

BIG4TIER2

TIER2

TIER2NSPEC

8.96
0.00
0.43

TIER2SPEC
BIG4NSPEC
BIG4SPEC
*
**
***

Model (1)

1.82
1.79***
0.27
3.97*
0.00001
3.12*
0.006
0.16
0.03
0.17
0.43
2.09**
0.10
0.81
0.02
0.14
1.02
0.50
2.48**

Model (2)
7.99
0.00
0.40
0.80
0.86
0.34
5.46*
0.00001
3.86*
0.02
0.49
0.07
0.34
0.39
1.83***
0.01
0.11
0.01
2.79***
0.09
0.34

Model (3)
8.03
0.00
0.43
1.85
1.82***
0.27
3.89*
0.00001
3.01*
0.003
0.07
0.03
0.17
0.41
2.00**
0.11
0.89
0.01
1.86***
0.13
0.92
0.56
2.39**

Model (4)
6.55
0.00
0.41
1.85
1.77***
0.27
3.78*
0.00001
3.1*
0.002
0.06
0.04
0.221
0.42
2.97***
0.10
0.84
0.01
1.82***
0.13
0.88

0.19
1.12
0.10
0.56

0.51
2.70***
0.11
0.60
0.03
0.08
0.57
2.24**
0.55
1.96***

Indicate signicance at the 0.01 level.

Indicate signicance at the 0.05 level.
Indicate signicance at the 0.10 level.

4.3. Sensitivity analysis

We performed sensitivity analyses to test the robustness of our results based on model (1), (3), and (4) specications in
Tables 5 and 6. We demonstrate the robustness for a wide range of sample selection and model specication issues.
First, we re-estimated the audit models using two new specications of industry specialization. We re-classied an audit
rm as a specialist if it audited the highest number of clients or if it is the top leader in that industry. The regression results
under these new specications are similar to our earlier ndings. Second, to examine if any one of the Big 4 auditing rms
impacts our ndings, we re-estimate the models by dropping that rm from the regressions. We nd that no single Big 4
rm inuences our results.
Finally, it is quite possible that the largest industry in our sample, namely the machinery industry comprising of 28% of the
sample rms, impacts the regression results. To control for industry inuence, we include an indicator variable (MACHINERY),
which has a value of 1 if a rm is in the machinery industry, 0 otherwise. Not reported, for all three models the coefcients
for MACHINERY are signicantly negative in both the statutory audit market and the supplementary market, indicating the
average audit fee is lower for clients in the machinery industry. The direction and magnitude of the coefcients for general
Big 4 brand name and the industry specialization variables remain unchanged. In addition, the R2 s increased slightly after
controlling the industry effect and the coefcients for other variables are comparable to the main ndings.
5. Conclusions and limitations
This study investigates the audit market in Chinas transitional economy using data from annual reports prepared by
publicly traded companies that issued both domestic and foreign shares. We examine variables that explain audit fees in
the developed market economies as well as variables unique to the Chinese economy. The results support our expectations
that audit fees in China are responsive to certain systematic inuences. Specically, we nd evidence of Big 4 premiums for

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K. Wang et al. / Journal of International Accounting, Auditing and Taxation 18 (2009) 6072

brand name as well as industry specialization in both the statutory and supplementary market. In addition, Big 4 industry
specialists can earn additional premiums in the statutory market as compared to non-industry specialists. We also nd the
strategy of expansion in China by the second tier audit rms did not provide them any price advantage. These audit rms
increased their market share mainly in the mid- and small-sized clienteles. However, industry experience developed by the
second tier rms may help them to gain economies of scale and reduce service fees. This may be an important strategy for
them to win future clients that seek low-priced audits.
Our study indicates that audit pricing in the Chinese economy has special features. The results can help enhance understanding of the audit markets in China and in similar developing countries. Firms can price their auditing services according
to our empirical results on the determinants of audit fee. Also, the second tier audit rms need to improve audit quality and
industry expertise rather than market power in order to earn fee premiums.
There are several limitations and extensions of this study which can be addressed in future research. First, our study
focuses on the audit market where rms issue both domestic and foreign shares. A concern is that the industry expertise
of auditors specic to this market segment may not represent the entire audit market and potential selection bias may
impact our results. This concern especially involves local and second tier audit rms as Big 4 auditors have very small market
share in companies that only issue domestic shares. Consequently, future studies can use an expanded sample of all public
companies that issue domestic shares to retest the audit fee models. Second, like most previous studies, this study has
examined only a couple of specications for industry specialization. Future studies can check the robustness of our ndings
using other measures of industry expertise developed in the literature. Finally, since both audit rms and public companies
in the Chinese environment have unique features, such as the stronger government and regional/geographical inuences in
the selection of audit rms, our ndings may not be generalized to other audit markets. Replications of audit fee models in
other national settings warrant potential research extensions of this paper.
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