Labor Mix Hours of Industry Specialist Auditors: Analysis on Audit Firm and Audit Partner

We investigate whether and how audit labor mix differs between industry specialist auditors and their non-specialist counterparts. Since high quality audit output is of the ultimate importance in the audit market, most previous studies focus on audit outputs (e.g., audit quality). However, audit outputs are influenced by audit inputs (e.g., audit effort). As such, the relationship between audit inputs and outputs is essential part of understanding how audit quality is determined. We extend the extant research by examining the audit labor mix of expert auditors identified at the audit partner level and audit firm level vis-a-vis the audit labor mix of their non-expert counterparts. Exploiting a regulatory development in Korea that requires mandatory disclosure of audit labor mix in conjunction with total audit hours from 2014, we test the relationship between audit expertise and audit partner hours, senior hours, and junior hours. We find that specialists identified at the audit partner level put more partner hours in audits than non-specialist partners. However, this relationship exists for experts identified only at the partner level and not at the audit firm level. We also find that specialist auditors put less junior hours or insignificantly different junior hours than non-specialist auditors identified at the firm level and the partner level. Our results are consistent across several different robustness tests. Our findings are robust even after controlling potential endogeneity by applying a propensity score matched sample, an entropy balanced matched sample, and the Big4 auditor client sub-sample. Taken together, our finding indicates that audit inputs are systematically different across specialist and non-specialist auditors.