AUDITING: A JOURNAL OF PRACTICE & THEORY ​Vol. 26, No. 2 November 2007 pp.

69–94​
Does

Industry Expertise Improve the Efficiency of Audit

Judgment?
Robyn Moroney

SUMMARY: ​Prior studies have found that industry specialists are more effective when working in specialization. It
has been argued that they should also be more efficient, but this has not been tested to date. The purpose of this
study is to determine whether industry specialists are more efficient at each stage of the decision-making process
when working in specialization. By breaking down and measuring efficiency at each stage of the decision-making
process, the opportunity is afforded to measure and compare the relative efficiencies of two groups of specialists in
very different industries, the manufacturing, and superannuation (pension fund) industries. A controlled experi-
ment was conducted in the offices of each of the Big 4 accounting firms. The two groups of specialists are found to
vary in the decision processes they use, bringing into question the assumption that all specialists behave the same
when working in specialization. It is the differences that are found between the industry groups that have
interesting implications for future research.

Keywords: ​behavioral decision theory; expertise paradigm; industry specialization.

INTRODUCTION ​
I​ ndustry specialization has been used as a means of distinguishing between the largest

accounting firms (Francis et al. 1999; Hogan and Jeter 1999). It allows firms to improve efficiency, create barriers to
entry, and improve audit quality (Solomon et al. 1999). Prior studies have found that industry specialists are more
effective when working in spe- cialization. They are more knowledgeable about their industry and this allows them to
be more effective when working in specialization. It has been assumed that industry specialists are also more efficient
when working in specialization (for example, Wright and Wright 1997; Solomon et al. 1999; Low 2004). The
purpose of this study is to test whether industry specialists are in fact more efficient when working in specialization.
This is an important issue as it highlights and tests one of the benefits expected to accrue to specialists.
The current analysis breaks down the decision-making process into three stages to determine whether or not
industry specialists are more efficient at each stage of that process.

Robyn Moroney is a Senior Lecturer at Monash University.

I gratefully acknowledge the helpful comments of Jean Be ́dard (editor), two anonymous reviewers, Roger Simnett, ​Ken Trotman, Jean Bedard, Ed

O’Donnell, Robert Knechel, Arnold Wright, Richard Tubbs, Axel Schulz, George ​Tanewski, Carlin Dowling and Paul Coram, participants at
research workshops at the University of New South ​Wales, the University of Melbourne, Monash University, the Australian National University,

and the University of Auckland.

​ I also thank the Big 4 expert panel that helped write the cases and model solutions, and the participants ​for their

time.

​
Submitted: February 2006 Accepted: May 2007

69
70 ​Moroney

Breaking down the decision-making process allows a more detailed analysis of the varied processes used by different
groups of industry specialists. Indeed, by breaking down and examining each stage of the decision-making process, a
more complete picture of the relative benefits of specialization is provided.
Two very different groups of industry specialists were chosen for this study. This is consistent with prior
studies in the area of industry specialization that stress the importance of using two groups of specialists whose
knowledge base is very different from each other (for example, Solomon et al. 1999; Owhoso et al. 2002). In the
current study specialists in the manufacturing and superannuation (pension fund) industries are used. Manufacturing
specialists develop knowledge about various topics such as accounting for inventories, re- search and development,
the impact of technology on inventory pricing as well as the various accounting rules that apply to companies in that
industry. Superannuation specialists develop knowledge about the detailed legislation that governs that industry, the
various accounting regulations that apply to superannuation funds, and the methods of auditing the accounts peculiar
to clients in that industry. Both groups of specialists acquire very different sub-speciality knowledge (Bonner and
Lewis 1990) over and above their general domain knowledge, to excel as industry specialist auditors.
While it has been shown in prior studies that two such different groups of specialists should excel on tasks
set within their area of specialization, their relative efficiency gains have not been tested until now. According to the
literature, all groups of industry specialists are expected to benefit from their specialization in much the same way.
Their detailed industry sub-speciality knowledge allows them to have more accurate nonerror frequency knowledge
(Solomon et al. 1999), to be more effective when assessing inherent risk levels for accounts specific to the industry in
which they specialize (Taylor 2000), to be more effective when detecting errors for clients in their industry (Owhoso
et al. 2002), to develop task knowledge differently depending on their area of specialization (Thibodeau 2003), to
assess audit risk more accurately (Low 2004), and to interpret and complete partial cue patterns (Hammersley 2006).
An important purpose of this study is to determine whether the efficiency gains due to specialization also accrue to
specialists at each stage of the decision-making process.
An experiment was conducted in which manufacturing and superannuation industry specialist auditors from
all Big 4 accounting firms completed two industry-based cases. The cases were developed with the aid of industry
specialist Big 4 audit partners (the expert panel), who also selected the industry groups used in this study and
identified participants as being specialists in either of these industries.
The results of this research are of interest to both researchers and practitioners. They highlight the different
aspects of the decision-making process (pre-information search, in- formation search, and decision processing) where
industry specialists can be expected to be more efficient. While both groups are found to perform better when
working in spe- cialization, which is consistent with prior literature, the two groups of specialists are found to vary in
the decision processes they use, with the superannuation industry specialists being more efficient at each stage of the
decision-making process, while the manufacturing industry specialists are not. The manufacturing specialists are
found to be significantly more efficient when reading case materials and when reading information cues but not when
processing their decisions. Inferences are drawn about why these differences between the groups of industry
specialists occur. It is these differences that have interesting implications for future research. Another interesting
finding is that there is a significant relationship between the efficiency variables and performance but not in the
direction expected. All

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Does Industry Expertise Improve the Efficiency of Audit Judgment? 7
​ 1

participants, both when working in and out of specialization, tended to perform better when they were less efficient
(i.e., taking more time, steps, and so on).
The remainder of this paper is set out as follows. The next section contains background literature and
hypotheses in the areas of pre-information search, information search, and decision processing. The research design
follows. The experiment is then described fol- lowed by the results and supplementary analysis. Finally, limitations
are summarized and final conclusions are outlined.

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT Prior Research

The top tier accounting firms have used industry specialization to differentiate their services from other firms
(Francis et al. 1999; Hogan and Jeter 1999). Industry speciali- zation has helped them increase demand for certain
nonaudit services, improve efficiency, create barriers to entry, and improve audit quality (De Beedle 1997; Gramling
and Stone 2001). Audit firms achieve improved audit quality via industry specialization by investing in staff training,
databases, and subscribing to industry journals. Individual industry spe- cialists spend the majority of their time
auditing clients in the same industry. They build up a store of industry related knowledge that helps when auditing
and that they believe enables them to better market their range of services to clients. Until recently, there has been
little testing of the relationship between industry specialization and audit quality (Gramling and Stone 2001).
Behavioral decision theory is used to help explain why industry specialists provide their clients a
high-quality audit. According to behavioral decision theory, performance is deter- mined by an individual’s
experience, ability, and knowledge (Bonner and Lewis 1990; Libby and Luft 1993; Libby 1995). Expertise combines
knowledge and experience (Bonner and Lewis 1990; Ashton 1991). It has been defined as the ability, acquired by
practice, to perform qualitatively well in a particular domain (Be ́dard and Chi 1993). All factors result in the two
auditors having different areas of expertise (Bonner and Lewis 1990).
The expertise paradigm has been used to distinguish between experts and novices in auditor judgment
studies (Trotman 2001). Solomon et al. (1999) designed their experiments using the expertise paradigm guidelines.
By manipulating the client industries between tasks, industry knowledge was tested. By manipulating the task within
subjects, other au- ditor characteristics (such as their experience levels and ability) were controlled for.

Hypotheses
The hypotheses outlined in this paper are based upon the cognitive perspective of the expertise paradigm.
Figure 1 shows how the various elements of the decision-making proc- ess interact. The experiment tests and
compares efficiency at the pre-information search, information search, and decision-processing stages (the arrows in
Figure 1) of the decision- making process, as well as measuring the performance of auditors when working in and out
of specialization.

Pre-Information Search
Bonner and Pennington (1991) looked at the decision-making process used by auditors, who are found to
retrieve knowledge from memory, do an external information search, comprehend, generate hypotheses, evaluate
these hypotheses, and finally make a choice. Before searching for relevant information, either internally, from
memory, or externally, the first stage in decision-making involves gaining an understanding of the problem at hand.

Auditing: A Journal of Practice & Theory, November 2007

72 ​Moroney

FIGURE 1 The Diagnostic, Sequential, and Iterative Decision-Making Process

Pre-Information Information Decision Search Search

The pre-information search stage of the decision-making process is the decision-maker’s attempt to understand and
interpret the problem at hand (Christ 1993). Those with a better knowledge of the area in which a problem is set are
better at interpreting the problem and placing the problem information provided into a context (Libby 1981; Choo
1989; Biggs et al. 1988; Christ 1993). Biggs et al. (1988) reported that experts have an internal schema, which allow
them to identify, from their memory, the type of problem confronting them. This knowledge allows an expert to be
more efficient when faced with a problem in a setting familiar to them.
Industry specialization is a type of expertise. Auditors with industry-based knowledge are better at
understanding problems set within the industry they know about. As such, they spend less time gaining an
understanding of a task (Biggs et al. 1988). Experts are superior in their problem representations, utilizing a strategy
of converting a situation into a problem for which a solution can be provided, while novices lack domain-specific
strategies (Choo 1989), which results in poorer efficiencies when problem solving.
Industry specialists are expected to be more efficient during the pre-information search phase of the
decision-making process when working in specialization. Their superior knowl- edge of the industry in which they
specialize allows them to more efficiently attain a comprehensive understanding of the problem at hand when
working in specialization. As the decision-making process is sequential and iterative, efficiency is measured as time
spent reading (and re-reading) case material and the number of times a case is re-read until a complete understanding
of the problem at hand is achieved (Biggs et al. 1988; Choo 1989; Hershey et al. 1990; Salterio 1994). This is tested
by the following hypothesis:
 H1: ​Industry specialist auditors are expected to be more efficient when working in specialization than when
working out of specialization during the pre- information search stage of the decision-making process.

Information Search
When faced with a problem, an auditor will seek information to help understand the relevant issues and
indicate a solution (Bonner and Pennington 1991). The two types of information that can be sought are internal and
external to the individual auditor. Internal information is knowledge held in memory and external information is the
product of client discussions, work papers, databases, and industry data (Koonce 1993).
When compared to novices, experts have in memory more of the knowledge necessary to solve a problem set
within their area of expertise (for example, Davis and Solomon 1989; Koedinger and Anderson 1990; Bonner and
Pennington 1991; Choo and Trotman 1991;

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Does Industry Expertise Improve the Efficiency of Audit Judgment? 7
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Solomon et al. 1999; Rikers et al. 2002). Industry specialists have in their memory more industry related information
to help them solve problems set in their industry, making them more efficient when searching for and reading
information (Solomon et al. 1999). As such, industry specialists are less likely to access information familiar to them,
such as industry- relevant accounting standards and legislation that they would be familiar with when auditing clients
within their area of specialization.
Industry specialist auditors are expected to be more efficient during the information- search stage of the
decision-making process. Efficiency is measured as time taken searching for and reading information and the number
of information cues selected and read (Be ́dard and Mock 1992; Salterio 1994). This is tested by the following
hypothesis:

H2: ​Industry specialist auditors are expected to be more efficient when working in specialization than when
working out of specialization during the infor- mation search stage of the decision-making process.

Decision Processing
Experts (including industry specialists) have been found to use a different decision process than novices use.
They tend to be more efficient—using fewer steps, are more goal oriented, and use a forward driven schema (Elio
and Scharf 1990; Bonner and Pennington 1991; Be ́dard and Mock 1992; Be ́dard and Chi 1993; Solomon et al. 1999;
Rikers et al. 2002). Be ́dard and Mock (1992) and Be ́dard and Chi (1993) reported that experts were found to be
more efficient at processing problems set in their area of expertise. Industry specialists are expert auditors, who are
also expected to be more efficient when working in specialization (Solomon et al. 1999).
Industry specialist auditors are expected to use a more efficient decision process when working in
specialization. From the discussion in this section, efficiency is measured as number of steps taken, amount of time
taken throughout each case, and number of recur- sions in solving each case (Bonner and Pennington 1991; Be ́dard
and Mock 1992; Salterio 1994). Recursions refer to going back and re-reading case material and/or information cues.
This is tested by the following hypothesis:

H3: ​Industry specialist auditors are expected to employ a more efficient deci- sion process when working in
 specialization than when working out of specialization.

Link between Efficiency and Effectiveness

Hypotheses 1, 2, and 3 predict that industry specialist auditors will be more efficient during the
pre-information search, information search, and decision processing phases of the decision-making process. Due to
learning opportunities when working in specialization, industry specialists are expected to be both more efficient and
more effective (for example, Salterio 1994; Solomon et al. 1999) when working in specialization than when working
out of specialization. It is of interest to measure the impact of efficiency on effectiveness (performance) at each stage
of the decision-making process. The fourth hypothesis tests the theory that a more efficient decision-making process
will result in a better decision being made (for example, Libby and Luft 1993; Libby 1995) by specialists.

H4: ​A greater positive relationship is expected between efficiency at each stage of the decision-making
process and performance for industry specialists when working in specialization than when working out of
specialization.

Auditing: A Journal of Practice & Theory, November 2007

74 ​Moroney

RESEARCH DESIGN ​A 2 2 design is used for testing the hypotheses. The first
independent variable is auditor industry specialization (manufacturing or superannuation). The second independent
variable is the client (case) industry setting. Each participant completed two cases, one set in the manufacturing
industry and the other set in the superannuation industry.
The manufacturing case (one page long) deals with research and development expen- diture. The task
comprises some information regarding a client and five questions. The questions include how to audit research and
development expenditure, which items from a list provided in the case material could be capitalized, and how a
government grant should be handled. To correctly answer the problem set in the case, participants require knowledge
of the manufacturing industry and various accounting standards. Excerpts from these stan- dards were provided as
information cues.
The superannuation case (two pages long) deals with the identification of audit pro- cedures necessary to
confirm listed audit assertions and compliance with legislation. An audit report and a list of investments to be audited
are included in the case material. To correctly answer the problem set in the case, participants require knowledge of
the regu- lations impacting the reporting of results in financial statements. The information cues provided to
participants included excerpts from industry specific accounting standards and regulations. These regulations detail
the auditing and disclosure rules particular to super- annuation funds.

Participants
Eighty-six participants from each of the Big 4 accounting firms took part in the ex- periment. The expert panel
selected the industry groups that would be made available, invited participants to take part, and indicated which
industry each specializes in. To be consistent with prior studies (for example, Solomon et al. 1999) and the theory
outlined above regarding expertise, participants with less than two years industry audit experience were excluded
from the current study.​1 ​Details of the participants are provided in Table 1. While the superannuation industry
specialists had significantly more audit experience than the manufacturing industry specialists (7.4 compared to 5
 years experience, t 2.378, p .020, not tabulated), there was not a significant difference in their years auditing in their
specialist industry, with the superannuation specialists having an average of 5.2 years industry audit experience
compared to 4.6 years for the manufacturing specialists (t .782, p .437, not tabulated).​2 ​The data in Table 1 also show
that there are differences in the task experience reported by participants.

Task Development
The expertise paradigm (Einhorn 1976; Be ́dard 1989; Libby and Luft 1993; Libby 1995; Solomon et al.
1999) was utilized in testing the decision-making processes and

1​
The firms provided 97 participants. The excluded participants came from both the manufacturing (7) and su- perannuation (4) industries, resulting

in 86 participants overall. All hypotheses were re-tested with all participants

included. All significant and nonsignificant results remained as reported. ​2 ​To test the impact of experience on the results reported in this

paper, all of the tests presented in this paper were

​ re-conducted for only those with four years of industry-based experience or more. There was no

change ​in the variables identified as significant. Thus, the inclusion of participants with less than four years of industry- based
​ experience was not a
determining influence on the reported results.

Auditing: A Journal of Practice & Theory, November 2007

Does Industry Expertise Improve the Efficiency of Audit Judgment? ​75
TABLE 1 Descriptive Statistics for the Participants

Specialists in the ​Manufacturing Industry

​ pecialists in the ​Superannuation Industry ​Number of

Auditing: A Journal of Practice & Theory, November 2007 S
Participants​a ​48 38 Average number of years of audit experience 5 years 7.4 years Average number of years auditing the

industry they ​specialize in 4.6

​ years 5.2 years Minimum/Maximum number of years experience ​auditing the industry they

specialize in Minimum
​ 2 yrs ​Maximum 16 yrs Minimum
​ 2 yrs ​Maximum 27 yrs Proportion
​ of participants from each

industry setting ​with personal experience advising clients on issue used in the manufacturing case (research and

development)
46% 7%

Proportion of participants from each industry setting ​with personal experience advising clients on issue used in the

superannuation case (investments for a superannuation fund)

14% 97%

The firms provided 8 (4), 13 (11), 19 (13), and 8 (10) manufacturing (superannuation) industry specialists,
a​

respectively.
performance of industry specialist auditors. This paradigm stresses the importance of spec- ifying the
knowledge necessary to complete a specified task and that the task must be developed so that the
implications of using (or not using) that knowledge are observable (Libby and Luft 1993).
The cases were developed with the help of the expert panel (the manufacturing and superannuation cases)
 and corporate executives (the practice case). The expert panel com- prised industry specialist audit partners
from each of the Big 4. Each firm provided access to one partner from each industry setting. The cases were
initially developed with six partners from three of the Big 4. The cases and solutions were written by some of
these partners and then sent around to the other industry specialist partners and back to the initial partners
until all agreed on the wording and the content. The information cues were selected and agreed upon by all
relevant (industry specialist) partners. Prior to conducting the ex- periment, partners from the fourth firm
confirmed that the cases, information cues, and solutions reflect the types of issues their industry specialist
auditors would confront when working in specialization. All partners confirmed that the case set in their
industry tests industry knowledge and deals with an issue that their staff may encounter when auditing clients
in that industry, while the case set in the other industry would be difficult for their industry specialist staff to
tackle.
According to the expert panel members, the cases are realistic, based upon real prob- lems faced by industry
specialist auditors (Be ́dard and Biggs 1991a, 1991b; Gibbins and Jamal 1993; Trotman 1996). They are
sufficiently ill defined (Abdolmohammadi and Wright 1987; Be ́dard and Biggs 1991a, 1991b; Trotman
1996) in order to test each area of industry specialization (Be ́dard and Chi 1993). Had the cases been too
simple and structured, the auditors would have been expected to perform equally well on both cases (Be ́dard
and Biggs 1991b; Bonner 1990). According to the expertise paradigm, had the cases been too
76 ​Moroney

complex, the industry specialists may not have been able to perform better on the tasks set in their area of
specialization (Hershey et al. 1990; Spence and Brucks 1997).​3
The information cues used in this study contain the type of information that industry specialist auditors
should be aware of (Solomon et al. 1999), such as, excerpts from ac- counting standards and legislation. If the
information cues had included items that industry specialists are not familiar with, they may have selected the items
and spent time reading them. By using cues that the specialists would use when working on problems such as those
contained in the cases, their efficiency during the information search stage of the decision-making process can be
measured.

THE EXPERIMENT ​A researcher was present when the experiment was

conducted in the offices of each of the Big 4 accounting firms. Participants were provided an introduction on paper,
explaining in broad terms the purpose of the experiment. They were also asked for their agreement to take part.
Participants were asked not to take notes​4 ​as it was important to trace the number of times they needed to re-read the
case and information cue materials for testing the efficiency hypotheses.
Each participant was invited to log onto the Internet-based software using a unique username and password.
They first read an introduction online explaining the project, the order tasks were to be completed, and how the
program was to be used. Participants then read through a practice case and accompanying information cues to
familiarize themselves with the format of the software used. To save time, they were specifically asked not to provide
a complete answer for the practice case.
Participants then completed two cases, one set in their area of industry specialization. The order of the two
cases was varied between subjects to control for any demand effects.​5 ​Finally, participants answered a series of exit
questions. The Internet program used tracked the decision process used by each participant.
Figure 2 contains an illustration of the decision process used in this study. It was constructed by arranging
the stages in the decision-making process from Figure 1 (pre- information search, information search, and decision),
highlighting all of the steps that were available to participants. The decision process is the same for both the
manufacturing and the superannuation case, as the stages in the decision-making process are the same.
Participants were first provided with a case to read. They then could either read the information cue menu,
where they could select and read a maximum of eight information cues, or go straight to the solution input screen,
where they could begin providing an answer to the problem contained in the case. The information cues were
presented in alphabetical order by the name of standard, regulation, and so on. From that list, participants were able

3​
The Internet-based computer program developed for this experiment was pilot tested by five academics, three Big
​ 4 partners, and three junior

members of staff from two Big 4 firms. The purpose of the pilot test was to ​determine whether the instructions and case materials were understood

and that the Internet program captured ​the data appropriately, reporting time spent, information cues read, the processes used, and the solutions to
each ​case were properly saved. As a result of this testing, the questions asked in each case were reproduced at the top
​ of each solution input screen

to avoid participants having to go back and re-read the case materials when ​moving on to answer the next part of each question. For clarity, the exit

questions were also re-worded slightly. 4​ ​Participants were not told the reason for this instruction. 5​ ​A test was conducted to measure any possible

order effects. There was no significant difference for time reading the
​ cases (t 0.489; p .625), re-reading case materials (t 1.141; p .255), time
reading information cues ​(t 1.253; p .212), number of cues (t 1.209; p .228), number of steps (t 0.725; p .469), time overall
​ (t 1.678; p .105), and
number of recursions (t 0.732; p .465).

Auditing: A Journal of Practice & Theory, November 2007

Does Industry Expertise Improve the Efficiency of Audit Judgment? ​77

FIGURE 2 Decision Process

Cue 1

Cue 2

Cue 3 Case Information

Menu Cue 4

Cue 5

Cue 6 Solution Input Cue 7 Screen

Cue 8

to determine the nature of the information provided. According to the expert panel, those with industry knowledge
were familiar with the information provided and would only have accessed information when working in
specialization to jog their memory. When they fin- ished reading an information cue, they were returned to the
information cue menu where they could select another cue to read, go back and re-read the case, or go on to provide a
solution to the problem. When providing a solution, participants were advised that they could go back and re-read the
case, go to the information menu, or submit their completed solution. The arrows in Figure 2 show the path a

participant could follow when completing a case.​Data were captured for each participant as they completed the

experiment. Data col- lected

​ included each participant’s username and password, their solution to each case,​6 ​a list of
clicks (this term refers to clicks on the mouse to move between screens) and time spent at each stage,​7 ​responses to

questions asked in the cases, and responses to the exit questions used in compiling Table 1.​THE RESULTS
The results for the first three hypotheses are presented in Tables 2–4. The tables include the results of a
multivariate analysis of variance (MANOVA) using Wilk’s Lambda for overall efficiency at each stage of the
decision-making process. The results for each de- pendent variable are then analyzed using univariate analysis of
variance (ANOVA). Both within-subject and between-subject simple effects are provided. This allows a
within-subject

6​
Two experienced researchers coded the cases to measure performance using the expert panel’s model solutions. Cohen’s
​ Kappa (1960) was used

to measure inter-rater agreement. The Kappa for the manufacturing (superan- ​nuation) case was 0.9466 (0.9007). Both are significant at p .001. 7​

The click information shows the order and time spent on each aspect of the experiment (reading/re-reading case materials, accessing information

cues, and writing a solution). The click data were transferred to a spreadsheet
and independently checked.

Auditing: A Journal of Practice & Theory, November 2007

78 ​Moroney

analysis, in line with the hypotheses being tested and a between-subject analysis where each case is held constant.
For each significant interaction between the independent vari- ables, an interaction plot is provided. Descriptive
statistics including the mean, standard deviation, and range for participants in each cell are also provided. Interaction
plots are provided where the results suggest that participants were more efficient when working in specialization.

Results for Pre-Information Search

The first hypothesis predicted that industry specialist auditors would be more efficient during the
pre-information search stage of the decision-making process, where efficiency is measured as amount of time spent
reading case materials and the number of times that case materials are re-read. The overall results of the MANOVA
presented in Panel A of Table 2 are insignificant (p .10).
For time reading case materials, Panel A of Table 2 shows a significant interaction between auditor industry
specialization (​AIS)​ and client industry (​CI​) (F(1,84) 4.46, p .04). The plot in Panel C shows that the shape of the
interaction between these variables is as predicted. Simple effects are carried out on the difference in time reading the
case materials. As expected manufacturing specialists spent less time (about one minute) reading the manufacturing
case than reading the superannuation case (t 1.990, p .03, one- tailed test). Superannuation specialists spent less time
(over half a minute) reading the superannuation case than reading the manufacturing case, however the difference is
 not significant (p .20).
For re-reading the case materials, Panel A of Table 2 shows an insignificant interaction between ​AIS ​and ​CI
(F(1,84) 0.16, p .6). The superannuation specialists behaved as expected re-reading their case less often than the
manufacturing case (t 2.171, p .02, one-tailed test) and they re-read the superannuation case less frequently than the
manufac- turing specialists, however, the difference is not significant (p .20). The manufacturing specialists did not
behave as expected. They re-read the manufacturing case more often than the superannuation specialists did and
re-read the manufacturing case more often than the superannuation case, despite taking significantly less time when

doing so as indicated above.​The results offer some support for the first hypothesis, with the superannuation spe-
cialists behaving as expected for each measure of efficiency at the pre-information search stage of the
decision-making process. The manufacturing specialists are more efficient when measured as time reading cases but
not when measured as number of times case materials are re-read.

Results for Information Search

The second hypothesis predicted that industry specialist auditors would be more effi- cient during the
information search stage of the decision-making process, where efficiency is measured as amount of time spent
searching for and reading information cues and the number of cues selected. The overall results of the MANOVA
presented in Panel A of Table 3 are marginally significant (p .10).
For time spent searching for and reading information cues, Panel A of Table 3 shows a significant interaction
between ​AIS ​and ​CI ​(F(1,84) 9.810, p .003). The plot in Panel C shows that the shape of the interaction between these
variables is as predicted. Simple effects are carried out on the difference in time searching for and reading
information cues. As expected, manufacturing specialists spent less time when working on the manufacturing case
than when working on the superannuation case (t 1.704, p .05, one-tailed test).

Auditing: A Journal of Practice & Theory, November 2007

TABLE 2 Pre-Information Search (H1)
Panel A: MANOVA and ANOVA

Overall—MANOVA Wilk’s ​Lambda F p**

Time Reading ​Cases

F p**
Re-Reading Cases
F p** ​Auditor Industry Specialization (​AIS​) .989 .920 .400 .430 .514 .274 .602 Client Industry (​CI​) .934 5.853 .003 .440
.573 9.950 .002 ​AIS CI .​ 977 1.964 .144 4.456 .038 .160 .690
Panel B: Mean (Standard Deviation) [Range]
Client Industry
Time Reading Cases
Re-reading Cases Auditor Industry Specialization

Auditor Industry Specialization Manufacturing Manufacturing Superannuation ​(n 48) (n 48) (n 38) Manufacturing
​
5.34 ​(2.29) [1.92–12.02]

Superannuation ​(n 38)

t 0.183 (.428)*

Superannuation 6.32 ​(2.53) [2.38–15.53]

6.42 t 1.837 (.035)* 4.08 3.97 ​(3.16) (3.07) (2.30) [2.78–15.82]

[0–14]

[1–10] 5.85
​ t 0.781 (.219)* 3.13 2.74 t 0.670 (.253)* ​(3.02) (2.69) (2.65) [1.73–13.52]

[0–12]

[0–14] t​ 1.990 (.025)* t 0.799 (.214)* t 1.629 (.054)* t 2.171 (.017)*

(​continued on next page​)
TABLE 2 (continued)
Panel C: Interaction Plot—Time Reading Cases
Time Reading Case Materials
7.00
6.00
5.00
s etuni​
4.00 ​ M0.00
Manufacturing Case Superannuation Case
Manufacturing Specialists Superannuation Specialists 3.00
2.00
1.00
*, ** one- and two-tailed, respectively.
TABLE 3 Information Search (H2)
Panel A: MANOVA and ANOVA
Overall—MANOVA Wilk’s Lambda F p**

Time Searching ​for and Reading Information Cues F

​ p**
Number of Cues
F p** ​Auditor Industry Specialization (​AIS​) .990 .812 .446 .028 .867 .134 .715 Client Industry (​CI​) .937 5.574 .005 .193
.662 11.321 .001 ​AIS CI .​ 971 2.510 .084 9.810 .002 11.321 .001
Panel B: Mean (Standard Deviation) [Range]
Client Industry

Time Searching for and Reading ​Information Cues Auditor

​ Industry Specialization
Superannuation ​
(n 48) ​ (n 38)

Number of Cues Auditor Industry Specialization Manufacturing ​(n 48) Superannuation

​ ​(n 38) Manufacturing
​ 3.46

(3.28) [0–11.13]
t 1.010 (.158)*

Superannuation 5.07 ​(5.69) [0–21.60]

5.51 t 1.893 (.031)* 2.50 3.13 ​(6.54) (2.58) (3.22) [0–22.07]

[0–8]

[0–8] 3.36
​ t 1.338 (.093)* 2.50 1.47 t 1.838 (.035)* ​(6.11) (2.81) (2.23) [0–29.83]

[0–8]

[0–8] ​t 1.704 (.046)* t 1.475 (.072)* t 0.000 (1.000)* t 2.609 (.005)*

(​continued on next page​)
 TABLE 3 (continued)
Panel C: Interaction Plot—Time Searching for and Reading Information Cues
Time Seaching and Reading Information Cues
6.00
5.00
4.00
s etuni​
3.00 MManufacturing Specialists
Superannuation Specialists
2.00
1.00
0.00
Manufacturing Case Superannuation Case
(​continued on next page​)
TABLE 3 (continued) Manufacturing Specialists Superannuation Specialists

Panel D: Interaction Plot—Number of Cues

Information Cues 1.00

3.50
0.50

3.00
0.00
Manufacturing Case Superannuation Case
2.50
*, ** one- and two-tailed, respectively.

s euCf or ebmu​
N2.00 1.50
84 ​Moroney

Superannuation specialists also spent less time when working on the superannuation case than when working on the
manufacturing case (t 1.475, p .1, one-tailed test). A between-subject comparison shows that the manufacturing
specialists spent less time than the superannuation specialists (t 1.893, p .04, one-tailed test) when working on the
manufacturing case and the superannuation specialists spent less time than the manufac- turing specialists did, (t
1.338, p .10, one-tailed test) when working on the superan- nuation case.
For number of cues selected and read, Panel A of Table 3 shows a significant interaction between ​AIS a​ nd ​CI
(F(1,84) 11.321, p .002). The plot in Panel D shows that the manufacturing specialists selected the same number of
cues for both cases, while the su- perannuation specialists selected fewer when working in specialization. Simple
effects are carried out on the difference in number of cues. As expected, the superannuation spe- cialists selected
fewer cues when working on the superannuation case than when working on the manufacturing case (t 2.609, p .006,
one-tailed test). A between subject comparison shows that the superannuation specialists selected fewer cues than the
manu- facturing specialists did, (t 1.838, p .04, one-tailed test) when working on the super- annuation case. The
manufacturing specialists selected fewer cues than the superannuation specialists when working on the
manufacturing case; however, the difference is not signif- icant (p .15).
The results offer some support for the second hypothesis. The results are significant for time spent searching
for and reading information cues. While directionally correct, the results for number of cues are only significant for
the superannuation case. Also, only the superannuation specialists select significantly fewer cues when working in
specialization than when working out of specialization.

Results for Decision Processing

The third hypothesis predicted that industry specialist auditors would employ a more efficient decision
process, where efficiency is measured as number of steps, time overall, and number of recursions. The overall results
of the MANOVA presented in Panel A of Table 4 are insignificant (p .10).
For number of steps, Panel A of Table 4 shows a significant interaction between ​AIS a​ nd ​CI ​(F(1,84) 4.063, p .047).
Simple effects are carried out on the difference in number of steps. As expected, the superannuation specialists took
fewer steps when working on the superannuation case than when working on the manufacturing case (t 3.217, p .002,
one-tailed test) and took fewer steps than the manufacturing specialists did, (t 2.025, p .03, one-tailed test) when
working on the superannuation case. The manu- facturing specialists took fewer steps than the superannuation
specialists when working on the manufacturing case (p .3) and took fewer steps when working on the superannuation
case, which is contrary to expectations.
For time overall, Panel A of Table 4 shows an insignificant interaction between ​AIS ​and ​CI ​(F(1,84) .126, p .7). As
expected, the superannuation specialists spent less time completing the superannuation case than the manufacturing
case (t 2.011, p .05, one-tailed test). Both groups of specialists spent more time on the manufacturing case. For
number of recursions, Panel A of Table 4 shows an insignificant interaction between ​AIS ​and ​CI ​(F(1,84) .747, p .3).
As expected, the superannuation specialists took fewer recursions when completing the superannuation case than the
manufacturing case (t 3.196, p .002, one-tailed test). Both groups of specialists took fewer recursions when working
on the superannuation case. These results do not support H3.

Auditing: A Journal of Practice & Theory, November 2007

TABLE 4 Decision Processing (H3)
Panel A: MANOVA and ANOVA

Overall—MANOVA Wilk’s ​Lambda F p**

a
Steps​
Time
F p**
F p**
Recursions​a
F p** Auditor Industry Specialization (​AIS​) .994 .330 .804 0.622 .433 .100 .753 .456 .501 Client Industry (​CI​) .913 5.281
.002 16.591 .000 13.132 .000 21.215 .000 ​AIS CI .​ 963 2.097 .103 4.063 .047 .126 .724 .747 .390
Panel B: Mean (Standard Deviation) [Range]
Client Industry

Recursions ​Auditor Industry Specialization ​Manufacturing ​(n 48) Superannuation

​ ​(n 38) Manufacturing
​ 22.06

(16.14) [2–69]
Steps
Time ​Auditor Industry Specialization

Auditor Industry Specialization ​Manufacturing Superannuation Manufacturing Superannuation ​(n 48) (n 38)

(n 48) (n 38)
 t 0.047 ​(.482)*

Superannuation 18.35 ​(15) [2–65]

23.5 t 0.388 29.64 29.52 t 0.045 6.23 6.18 ​(18.15) (.350)* (10.43) (13.79) (.482)* (4.52) (4.24) [4–63]

[10.92–51.83]

[7.32–65.93]

[0–20]

[1–16]
t 1.203 ​(.117)* t​ 1.166 ​(.123)* t​ 3.217 ​(.001)* t​ 2.297 ​(.012)* 12.53
​ t 2.025 24.31 23.03 t 0.444 4.38 3.47 ​(10.62) (.023)*

(12.24) (14.34) (.329)* (3.73) (3.06) [2–40]

[4.13–61.58]

[5.28–64.00]

[0–17]

[0–12] ​t 2.011 t 2.192 t 3.196 ​(.048)* (.016)* (.001)*

*, ** one- and two-tailed, respectively. ​a Steps
​
refer to movements between screens when completing each case, and recursions refer to

going back and re-reading case material or information cues.

86 ​Moroney

Results for the Link between Efficiency and Effectiveness

The fourth hypothesis considered the impact of the decision-making variables on per- formance, which is
measured using the expert panel’s model solutions to the cases. Before this hypothesis can be analyzed, it is
important to first determine whether participants performed better on the cases set in their industry. Replications of
prior studies are of value to demonstrate that their findings hold in a different environment, using a different set of
data (see for example, Entwistle and Lindsay 1994). Table 5 includes the results for per- formance. Panel A shows a
significant interaction between ​AIS a​ nd ​CI (​ F (1,84) 69.677, p .001) for performance. The plot in Panel C shows that
the shape of the interaction between these variables is as expected. Manufacturing specialists performed better than
the superannuation specialists (t 6.026, p .001, one-tailed test) when working on the manufacturing case and the
superannuation specialists performed better than the manufac- turing specialists (t 4.191, p .001, one-tailed test) when
working on the superannuation case. With both groups of specialists also performing better when working in
specialization than when working out of specialization (t 8.140, p .001, for the manufacturing specialists and t 2.551,
p .007, for the superannuation specialists, one-tailed test) it is clear that these cases measure industry-based
knowledge. This result is consistent with prior studies that have found that industry specialists perform better when
working in speciali- zation (for example, Solomon et al. 1999).
The fourth hypothesis predicted a greater positive relationship between efficiency and effectiveness for
auditors when working in than when working out of specialization. When predicting a positive relationship between
efficiency and performance, a negative coefficient is expected, as those spending less time, for example, should
perform better. As the effi- ciency variables are highly correlated (p .008, not tabulated), a factor analysis was
conducted. The factor analysis indicated that the pre-information search variables (re- reading case materials and time
reading case materials) together with time overall, loaded on one factor (hereafter referred to as cases and time),
while the information search vari- ables (number of cues and time searching for and reading cues) together with
number of steps and number of recursions, loaded on the other factor (hereafter referred to as search, steps, and
recursions). The same variables loaded on these two factors for both groups of auditors (i.e., when working in
specialization and when working out of specialization).​8 ​The results of the regression for all auditors when working in
and out of specialization are presented in Panel A of Table 6 and the results for each of the groups of specialists
(manufacturing and superannuation) are presented in Panel B of Table 6.
The positive coefficients in Table 6 indicate that those that are less efficient tend to be more effective. This
finding is consistent for those working in and those working out of specialization (Panel A). The data are broken
down and a regression is run for each group of specialists in Panel B. This analysis allows an evaluation of the
differing behavior of each group of specialists. The results presented in Panel B indicate a significant (p .05) positive
relation between the search, steps, and recursions factor and performance for each group of specialists whether
working in or out of specialization. The results are also positive for the cases and time factor and performance. Only
the results for manufacturing specialists

8​
The factor analysis was conducted for the entire data set and then for the auditors working in specialization and
the auditors working out of specialization. Each time the same groups of variables loaded on two factors.

Auditing: A Journal of Practice & Theory, November 2007

TABLE 5 Performance
Panel A: ANOVA
F p** ​Auditor Industry Specialization (​AIS)​ 3.403 .069 Client Industry (​CI​) 16.069 .000 ​AIS CI ​69.677 .000
Auditor Industry ​
Panel B: Mean​a ​(Standard Deviation) [Range] Client Industry ​ Manufacturing (n 48)
Specialization ​
Superannuation (n 38) ​Manufacturing 4.95 ​(1.88) [1–9.5]
t 6.026 (.000)*

Superannuation 2.23 ​(1.32) [0–6]

2.60 ​(1.65) [0–6] 3.55

​ t 4.191 (.000)* ​(1.59) [1–7.5] t​ 8.140 (.000)* t 2.551 (.006)*
(​continued on next page)​
TABLE 5 (continued)

Panel C: Interaction Plot—Performance

4.00
Performance

6.00
e roc​
S3.00
Manufacturing Specialists ​
Superannuation Specialists

5.00
 Manufacturing Case Superannuation Case

2.00 *, ** one- and two-tailed, respectively. ​a ​The maximum

possible score was 10.

1.00

0.00
Does Industry Expertise Improve the Efficiency of Audit Judgment? 8
​ 9
TABLE 6 Impact of Efficiency Variables on Performance (H4)

Panel A: Regression [t-Statistic (p-Value)*] for All Participants When Working in and out of ​Specialization
Factor

Auditing: A Journal of Practice & Theory, November 2007 ​Auditors working in ​specialization (expected sign ) (n 86)

Auditors working out of ​specialization (expected sign ) (n 86) ​Intercept 26.776 ​(.000) ​18.447 ​(.000) ​Cases and Time

2.579 ​(.012) 2.979

​ ​(.004) Search,
​ Steps, and Recursions 6.647 ​(.000) 5.919
​ ​(.000)

Panel B: Regression [t-Statistic (p-Value)*] for Each Group of Specialists When Working in ​and out of

Specialization
Factor

Manufacturing ​specialists working in specialization (expected sign ) (n 48)

Manufacturing ​specialists working out of specialization (expected sign ) (n 48)

Superannuation ​specialists working in specialization (expected sign ) (n 38)

Superannuation ​specialists working out of specialization (expected sign ) (n 38) Intercept

​ 22.248 ​(.000) 15.262
​ ​(.000)

15.349 ​(.000) 10.118

​ ​(.000) Cases
​ and Time 1.719 ​(.092) 3.313
​ ​(.002) 2.778
​ ​(.009) 3.823
​ ​(.001) Search,
​ ​
Steps, and

Recursions 5.528
​ ​(.000) 4.499
​ ​(.000) 2.058
​ ​(.047) 5.919
​ ​(.001)
* One-tailed.
working in specialization are not significant.​9 ​As the results are consistently positive, with all those who are
less efficient being more effective, the fourth hypothesis is rejected as the results are consistent when
auditors work in specialization and out. Thus, the fourth hypothesis is rejected.
SUPPLEMENTARY ANALYSIS Task Experience
As reported in Table 1, 46 percent of manufacturing specialists and 7 percent of su- perannuation specialists
reported having had experience advising clients on the issue used in the manufacturing case. Also 97 percent
of superannuation specialists and 14 percent of manufacturing specialists reported having had some
experience with the issue contained in the superannuation case. Task specific experience was run as a
covariate for each of the
9 ​
Another way to deal with the high correlation between the efficiency variables is to run the regression for the decision processing

variables only (steps, time, and recursions). When this is done, time overall is found to be ​positively related to performance for both
 those working in specialization and those working out of specialization ​(p .02, not tabulated). This finding supports the results reported in

this section that both groups performed better

​ when taking more time.
90 ​Moroney

efficiency variables and the effectiveness (performance) variable. In each case, task specific experience was found to
be insignificant.
While it is of interest to determine whether task experience impacts the results pre- sented, this variable is
very different to industry specialization. The task experience variable used in the current study does not indicate
frequency or recency of experience. It is used to highlight the fact that, while specialist auditors may encounter a
variety of tasks when auditing clients in the one industry (such as when auditing clients in the manufacturing
industry), when they encounter an unfamiliar task set within the industry that they specialize in, their sub-speciality
knowledge allows them to perform well, even if they are less efficient when working on such a task.
To demonstrate this, a performance comparison is made between the two groups of industry specialists all of
whom reported having no task experience on the manufacturing case (26 manufacturing specialists and 35
superannuation specialists). The manufacturing specialists achieved an average score of 4.83 compared to 2.69 for
the superannuation specialists (t 4.735; p .001, not tabulated). Thus, it is clear that industry specialization provides a
more powerful explanation of superior performance than task experience. It indicates that industry specialist auditors
working on a variety of tasks when working in specialization will outperform nonspecialists even when the
specialists do not have expe- rience with the task at hand.

Information Cues
A number of participants selected no information cues.​10 ​The cues included information such as excerpts
from accounting and auditing standards that are publicly available. Each participant could select up to eight
information cues that were listed in alphabetical order. The cues do not add any new information to the cases and
reading them would only have helped participants not familiar with relevant standards and legislation. A test was
conducted to determine whether those that read more information cues were able to perform better. The result was
found to be significant (F 4.072, p .000, not tabulated). Thus the information cues identified by the expert panel did
help those participants that chose to use them. The information search and decision processing hypotheses were
retested, along with performance, excluding the participants that did not read any information cues. There was no
significant change in the results. Thus, the participants that did not read any information cues did not distort the
results presented here.
At the other extreme, some participants spent over fifteen minutes searching for and reading information
cues (see Table 3). Four manufacturing specialists spent more than fifteen minutes at this stage of the
decision-making process when working on the super- annuation case. Four (two) superannuation specialists spent
more than fifteen minutes at this stage of the decision-making process when working on the manufacturing (superan-
nuation) case. The data for these outliers were excluded from the data set and the analysis for each hypothesis was
retested. The overall results did not change.
The information cues for the manufacturing case (6,794 words in total) were shorter than those for the
superannuation case (11,037 words in total). A comparison of the time taken by all participants when selecting and
reading the information cues shows that they spent an average of 4.36 minutes when reading the manufacturing cues
and an average 4.32 minutes when reading the superannuation cues. The difference is not significant (t .003;
10 ​
Of the 86 participants, 35 read no cues for either case (19 manufacturing specialists and 16 superannuation
specialists).

Auditing: A Journal of Practice & Theory, November 2007

Does Industry Expertise Improve the Efficiency of Audit Judgment? 9
​ 1

p .479, one-tailed, not tabulated). Thus the length of the information cues did not distort the results presented here.

SUMMARY AND LIMITATIONS ​Significant results were found for time spent
reading case materials, time spent search- ing for and reading information cues, and performance. Participants re-read
the manufac- turing case more often (even though the manufacturing case is shorter than the superan- nuation case),
they read more information cues for that case and they took more steps, time, and recursions when completing that
case. Participants as a group also performed better on the manufacturing case.
The case effect may be explained by differences in the number of requirements for each case. While every
attempt was made to keep the cases as similar as possible with regard to degree of difficulty for specialists, number
of information cues, and length of case, there was some variation. The superannuation case was longer than the
manufacturing case. It included attachments to be read and lists of numbers. The question asked was multifaceted. In
both situations, the questions asked were those deemed important by the expert panel.
The manufacturing case was shorter but required a number of steps (5) to answer. A comparison of the time
taken by all participants when reading the case materials shows that they spent an average of 5.82 minutes when
reading the manufacturing case and an average 6.11 minutes when reading the superannuation case. The difference is
not signifi- cant (t .504; p .239, one-tailed, not tabulated). The question(s) for each case were reproduced at the top of
the answer input screen so that participants could glance up and remind themselves of the question or of the next part
of the question, without having to switch back and re-read the case. In spite of this modification made to the program
as a result of pilot testing, participants re-read the case materials more often when completing the manufacturing
case.
Another explanation for the case effect is differences between the groups of specialists. The superannuation
specialists behaved as expected throughout. They were more efficient and more effective when working in
specialization. Only one superannuation specialist had not had experience with the task used in the superannuation
case. On the other hand, only 22 of the 48 manufacturing specialists reported having experience with the task used.
While every care was taken to find tasks that would be familiar to all specialists when working in specialization, as
well as those unique to each industry, that was very difficult for the manufacturing industry.
Interviews were held with industry specialist partners from each of the participating firms after the
experiment was run and the results analyzed. It was reported to them that while the superannuation specialists
behaved as expected, the manufacturing specialists were not always more efficient when working in specialization.
The partners expressed their view that this result is understandable and reflects differences between the two
industries. While superannuation specialists encounter many of the same tasks when working in spe- cialization,
enabling them to build up significant experience, which translates into enhanced efficiencies, the same cannot be said
of manufacturing specialists. These auditors face more variety at their clients, which hampers the development of
improved efficiencies when working in specialization.
 CONCLUSION ​The purpose of the experiment described in this paper was to understand more about how each
stage of the decision-making process of industry specialist auditors varies when

Auditing: A Journal of Practice & Theory, November 2007

92 ​Moroney

working in and out of specialization. Behavioral decision theory was used to develop test- able hypotheses for the
pre-information search, information search, and decision processing stages of the decision-making process.
Industry-based cases were developed using the ex- pertise paradigm as a guide to the required structure of such tasks.
The results presented in this paper were significant for time taken reading case material, amount of time
taken to search for and read information cues, and for decision quality. The superannuation specialists behaved as
expected throughout, while there were mixed results for the manufacturing specialists. Interviews with industry
specialist partners from each of the participating firms indicate that this result may be explained in part by differences
in the industries being audited. The superannuation industry is highly regulated and auditors encounter many of the
same issues when moving from one client to the next. The manu- facturing industry is more varied. While
industry-specific knowledge is required when au- diting clients in this industry, which was captured by the case used
in this study, there is less scope for manufacturing specialists to build up enhanced efficiencies when working in
specialization. The results reported here have implications for future research in the area of industry specialization.

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