Abstract
This study investigates the association of industry specialization at the engagement partner level and audit firm level with aggressive earnings management and modified audit opinion. The study employs a sample of 570 firm-year observations of manufacturing industries on the Indonesia Stock Exchange from 2014 to 2018 using a binary logistic regression model. First, this study finds no evidence of a relationship between industry specialization at the engagement partner level and audit firm level with aggressive discretionary accruals. Furthermore, the author finds evidence of a positive association between industry specialization at the audit firm level and aggressive real earnings management due to high audit quality. Finally, the study finds evidence that industry specialization at audit firm level is likely to issue modified audit opinion. This study contributes to the study of industry specialization at the engagement partner level and audit firm level, which is rarely performed in Indonesia. Policy makers and capital market players might learn some lessons from the audit quality of external auditors with industry specialists as the gatekeeper of the capital market. Moreover, this study has provided a valuable perspective to practitioners, researchers, and policy makers in other emerging markets regarding the quality of industry specialization at the partner and audit firm level.
Highlights
Studies on individual audit partners have begun to increase lately (Lennox & Wu, 2018; Wang et al, 2015; Burke et al, 2019; Cianci et al, 2017; Dao et al, 2018)
This study investigates the association of industry specialization at the engagement partner level and audit firm level with aggressive earnings management and modified audit opinion
This study investigates the association of the industry specialization at the partner level and audit firm level to the audit quality as measured by accrual earnings management and real transactions at an aggressive level, as well as the likelihood to issue modified audit opinions
Summary
Studies on individual audit partners have begun to increase lately (Lennox & Wu, 2018; Wang et al, 2015; Burke et al, 2019; Cianci et al, 2017; Dao et al, 2018). Studies outside the United States found evidence that individual audit partners influence audit quality (Lee et al, 2019; Gul et al, 2017; Gul et al, 2013; Wang et al, 2015; Taylor, 2011). Gul et al (2013), for example, found that individual auditors have an influence on audit quality economically both in large and small audit firms. Previous studies found that the market responds to higher earnings when there is a shift of partners or auditors of lower quality to partners from higher audit firms (Abodia et al, 2015; Knechel et al, 2007).
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