This study examines the role of auditor industry expertise in the pricing of Big 5 audits in Australia. We test if the audit market prices an auditor's firm-wide industry expertise, or alternatively if the audit market only prices office-level expertise in those specific cities where the auditor is the industry leader. We document that there is an average premium of 24 percent associated with industry expertise when the auditor is both the city-specific industry leader and one of the top two firms nationally in the industry. However, the top two firms nationally do not earn a premium in cities where they are not city leaders. We further document that national leadership rankings are, in fact, driven by the specific offices where accounting firms are city leaders. Thus, the overall evidence supports that the market perception and pricing of industry expertise in Australia is primarily based on office-level industry leadership in city-specific audit markets.

ABSTRACT This study investigates the economic consequences of the IFRS 3 (2008) requirement for fair valuing earnouts. Using a hand-collected sample of earnout fair value estimates in acquisitions completed by Australian firms, we find that a significant portion of acquirers overstate initial earnout liabilities and strategically reverse them as operating gains to boost post-M&A earnings. These overstatements are more pronounced when acquirers face investment- and performance-related pressure but attenuated in the presence of high-quality auditors and debt-financed deals. Acquirers also obfuscate earnout-related disclosures, inhibiting investors’ assessment of earnout values. By doing so, managers extend their tenure. Further analysis reveals that IFRS 3 (2008) leads to a significant increase in both the frequency and magnitude of earnouts in public acquirers’ transactions. Overall, we highlight the accounting benefit of earnouts for acquirers under IFRS 3 (2008), with implications for investors, analysts, auditors, and standard setters. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G34; M41.