How does information technology affect the audit market? Evidence from Online Job Postings

Description

The advancement of information technology has reshaped our economy in many ways. Companies are making significant investments in information technology for use in various functional areas, such as marketing, operations, financial reporting, and internal audit. The auditing industry is no exception when it comes to experiencing disruptive effects. On the one hand, auditors have incentives to adopt information technology for improving effectiveness and achieving efficiency gains. On the other hand, as their clients increasingly adopt information technology, auditors have to be equipped with adequate IT skills to conduct the audit properly and competently. Over the past decade, accounting firms have spent approximately USD 3–5 billion annually on technology (PCAOB 2017a). How did the extensive application of information technology affect the audit market? Has information technology become a barrier that affects the ability of small audit firms to compete? These are important questions for policymakers to consider. If small audit firms are disadvantaged by their lack of resources to invest in information technology as it becomes an even more important factor in business, policymaker needs to consider its potential impact on the audit market. In responding to the UK’s Competition and Markets Authority survey question about the main barriers to the entry and expansion of non-Big 4 audit firms, the audit firm Crowe lists their inability to invest in large-scale technology solutions as one of the main barriers (Crowe 2018). In this project, we plan to explore a novel dataset, a near-universal coverage of firms' online job postings, to empirically examine the impact of information technology on the audit market. We propose and construct an empirical measure for audit firms’ information technology adoption by utilizing the textual information contained in online job postings. Recent economic literature has provided evidence on the validity of using firms’ job postings to measure their skill demand. Using the proposed measure of audit firms’ information technology, we plan to 1) document the general trend and differences in information technology adoption by audit firms for the period 2007-2018; 2) examine how information technology affects the audit market structure in terms of auditor-client compatibility, market share, and market exit? Lastly, we explore the variation among audit firms' information technology and examine how information technology affects audit quality.