Auditor Industry Specialization Research Articles

Diversity of Signing Auditors and Audit Quality

SUMMARY Using data for listed firms in China, where two auditors sign the audit report, we examine whether the diversity of signing auditors' characteristics affects audit quality. We find a positive association between diversity and audit quality, consistent with the notion that diversity facilitates team performance. Further analyses show there is a stronger association between cognitive, rather than demographic, diversity of signing auditors and audit quality. Our results are robust to the inclusion of client firm and engagement auditor fixed effects. Cross-sectional results indicate stronger effects of the cognitive diversity of signing auditors on audit quality in complex, opaque, less important clients or firms without industry specialist auditors. Findings from our study suggest that audit firms should allocate staff to audit teams in a manner that results in cognitively diverse audit teams because such teams are more likely to deliver high quality audits. JEL Classifications: M42.

The impact of IFRS complexity on analyst forecast properties: The moderating role of high quality audit

AbstractThis paper examines the impact of International Financial Reporting Standards (hereafter IFRS) complexity on analyst forecast properties including forecast errors, forecast dispersion and forecast revision. Because high‐quality audit is likely to moderate the effect of complexity on analyst forecast properties, Industry Specialization (ISP) as a proxy for high quality audit is introduced as a moderating variable in this paper. The complexity of individual IFRS standards is measured based on IFRS reconciliation statements capturing the adjustments on accounts affected by the changes in accounting standards. We analyze 322 companies listed on the Australian Securities Exchange (ASX). Our results suggest that all IFRS standards are not equally complex. A few standards are relatively more complex. These standards have a positive effect on analyst forecast errors, forecast dispersion and forecast revision. In addition, we find that high quality audit (proxied by city‐level industry specialist auditors) can mitigate the adverse impact of IFRS complexity on analyst forecast errors but not on forecast dispersion and revision. More interestingly, the mitigating effect of high quality audit is restricted to only a group of companies exposed to a higher level of aggregate IFRS complexity. The findings of our study contribute to the IFRS literature by identifying the most complex accounting standards. Secondly, this study provides an ex‐ante experiment in IFRS adoption, which can be used by adopting countries to understand the impact of IFRS on the analyst forecasts. Finally, our study helps regulators to understand the effects of the complexity of accounting standards on users of financial statements.

Do Seasoned Industry Specialists Provide Higher Audit Quality? A Response

Using several audit quality measures, Minutti-Meza (2013, MM) argues that controlling for client characteristics through matching eliminates the association between auditor industry specialization and audit quality. Gaver and Utke (2019, GU) argue that this result is unstable across matching techniques and, after considering specialist tenure, seasoned specialists generally provide higher audit quality than unseasoned auditors or non-specialists. Eshleman and Guo (2020, EG) propose that – for accruals-based audit quality measures only – industry fixed effects, not client characteristics, eliminate the association between specialization and audit quality. We note that EG’s (and MM’s) conclusions rely on a misinterpretation of p-values, where an insignificant p-value is taken as evidence of no effect (Cready 2020). We then revisit GU after including industry fixed effects and find that GU’s main conclusions generally hold: 1) descriptively, auditors tend to fall backwards into specialization rather than building specialization to attract clients, so that knowledge likely develops over time, 2) propensity score matching should be used with caution or not at all, and 3) specialist tenure generally plays a role in the relation between specialization and audit quality. We find new evidence that the effect of an additional year of specialist tenure is similar to the effect of an additional year of auditor tenure. Finally, we discuss future research opportunities regarding auditor industry specialization.

The beneficial effect of shareholder participation in general meetings: Evidence in the context of audit quality

Purpose – This paper aims to investigate how shareholder participation in general meetings (SPGM) affects audit quality Design/methodology/approach – We measure SPGM as the percentage of the ownership represented by the shareholders who attend the general meeting. We measure audit quality by auditor industry specialization, audit firm size, and auditor fees. In order to investigate the relationship between SPGM and audit quality, we use a sample of 576 firm-years from Iran’s capital market between 2012 and 2018 and employ multivariate regression analysis. Findings – The findings show that, in general, there is an insignificant relationship between SPGM and audit quality. However, we reveal that there is a positive and significant association between the presence of institutional shareholders in general meetings and audit quality. Furthermore, for the companies with a high presence of institutional shareholders in their general meetings, there is a significant and positive relationship between the participation of other shareholders in the general meetings and audit quality. Our findings are robust in regards to a variety of additional tests. Originality/value – Collectively, the findings reveal that the impact of SPGM on audit quality is conditional to the presence of institutional shareholders in general meetings. The findings provide further insights among the mixed evidence on the beneficial effects of SPGM.

Audit committee effectiveness characteristics and auditor switches involving industry specialists

The aim of this study is to investigate the association between audit committee effectiveness characteristics and auditor switches to or from an industry specialist audit firm. This study uses data on auditor changes from Audit Analytics, financial data from North American Compustat, and hand-collected data including audit committee characteristics (such as audit committee chair tenure, the proportion of auditing experts on the audit committee, etc.), the number of audit committee meetings and stock ownership from proxy statements between 2005 and 2011. The results reveal that firms with audit committees that have a large proportion of auditing experts are more likely to choose an industry specialist auditor when the firm switches its auditor. Furthermore, the results also show that the longer the tenure of the audit committee chair is, the more likely that the firm switches from a non-specialist to a specialist auditor. This study adds to the literature by exploring the association between audit committee effectiveness characteristics and auditor switches involving industry specialists. The findings inform regulators regarding the impact that audit committee effectiveness characteristics have on auditor switches involving specialists

The Role of the External Auditor in Managing Environmental, Social, and Governance Reputation Risk

Companies are under increasing pressure to manage their reputation on environmental, social, and governance (ESG) issues. Auditors are a potential source of ESG risk management expertise and assurance due to a deep understanding of their client’s ESG-related reputation risk (“ESG risk”) and their assurance reporting expertise. However, provision of nonaudit services (NAS) by the external auditor is controversial and public accountants are still defining their role in ESG risk control and reporting. We explore whether auditors effectively help companies manage heightened ESG risk in times of reputation crisis, using abnormal negative ESG-related media coverage as a measure of “tainted reputation”. Findings show a positive association between tainted reputation and NAS, and a positive association between the interaction of tainted reputation and NAS with future firm value. The positive interaction persists when we consider a proxy for other ESG risk management activities in our analyses, and for other measures of ESG risk management effectiveness (future stock returns and future tainted reputation). Subsample analyses indicate results are driven by companies audited by ESG industry specialist auditors, and that the association between NAS and tainted reputation is driven by companies owned by institutional shareholders. Using restatements as a proxy, we find no evidence to suggest that the interaction of NAS and tainted reputation is associated with impaired audit quality. Findings demonstrate an empirical linkage between tainted reputation and NAS, support the importance of managing ESG risk, and suggest auditors effectively help their clients respond to heightened ESG risk.

Audit quality and the trade-off between real and accrual earnings management in the oil and gas industry: the GCC evidence

PurposeThis paper examines the impact of audit quality on the managerial preferences between real and accrual earnings management (REM and AEM, respectively) in oil and gas firms operating in the Gulf Cooperation Council (GCC) member countries.Design/methodology/approachThe study relies on the modified Jones model’s (Dechow et al., 1995) to capture AEM and employs Roychowdhury (2006) approach to examine the use of REM through abnormal cash flows, abnormal production and abnormal discretionary expenditures. Audit quality is measured by auditor-industry specialization. The analyses are based on a sample of 30 oil and gas firms from 2008 to 2019.FindingsThe findings highlight that sample companies may substitute between earnings management strategies and tend to shift from AEM to REM when audited by an industry expert. Further analysis points out that the trade-off decision of the pooled sample stems from both upstream and downstream sectors.Research limitations/implicationsThis study is subject to two main limitations. First, the narrowed scope of audit quality related factors due to the scarcity of corporate governance reports of companies. Second, the sample size is reduced.Practical implicationsThe regulators and users of financial statements should be aware that REM strategy is used by oil and gas firms even when scrutinized by a high quality auditor, calling for extra caution when auditing or analyzing the financial information.Originality/valueThe current research is the first, unveiling the association between audit quality and the trade-off between AEM and REM in a less inspected sector and a unique institutional setting.

Komite Audit, Kualitas Audit dan Manajemen Laba (Studi Empiris Pada Perusahaan Non-Finansial Yang Terdaftar di Bursa Efek Indonesia Tahun 2014-2017)

Interaction between various internal and external corporate governance mechanism in reducing earning management must be analyzed deeply. Based on this case, this study aims to analyze the effect of the effective audit committee and the interaction between the audit committee with the qualified external auditor in reducing earning management. Audit committee is measured by forming a score from the number of members formed an audit committee and the number of audit committee’s meetings in one year, while audit quality from external auditor is measured based on the auditor’s industry specialization, auditor’s reputation and audit tenure. The sample of this study was obtained through purposive sampling method so that 93 samples of non-financial company in Indonesia was obtained. A linear-multiple regression analysis was used to test the hypothesis of this study. The result of this study indicate that the audit committee has a negative effect on earning management, the interaction between the audit committee and industry specialist auditor has no effect on earning management, the interaction between the audit committee and Big Four auditor has a negative effect on earning management and the interaction between the audit committee and auditor tenure has no effect on earning management.

Pengaruh Karakteristik Auditor Terhadap Audit Report Lag

This study is intended to prove empirically the effect of Auditor Characteristics on Lag Audit Reports. This research is classified as quantitative research with a causative approach. The population in this study is financial sector companies listed on the Indonesia Stock Exchange in 2014-2018. The purposive sampling method is used, so there are 61 financial sector companies obtained as a sample in year 2014-2018. The type of data is secondary data obtained from www.idx.co.id. The analytical method used is multiple linear analysis.The results of this study indicate that (1) The auditor's reputation has a negative and not significant effect on audit report lag (2) Audit tenure has a positive and not significant effect on audit report lag (3) The auditor industry specialization has a positive and not significant effect on audit report lag (4) Auditor switching has a positive and not significant effect on audit report lag.

Financial capacity and the demand for audit quality

Prior research documents that financial capacity could be positively or negatively associated with the demand for audit quality. We re-examine this relation using changes in local real estate prices as exogenous shocks to corporate financial capacity. Using auditor size, auditor industry specialisation, and auditor fees as measures of audit quality, we find robust evidence that an increase (decrease) in financial capacity significantly reduces (increases) the demand for audit quality, and that this relation is more pronounced when firms are more financially constrained, when external monitoring by institutional investors and financial analysts is weaker, and when there is more negative news about real estate price changes. Our study enriches the related literature by describing a more complete and dynamic relationship between audit quality and financial capacity.

The effect of auditor industry specialization and board independence on the cash flow reporting classification choices under IFRS: evidence from Taiwan

PurposeThis study aims to explore the relationship between audit partner and firm industry specialization and board of director independence on the decision by Taiwanese firms to use International Financial Reporting Standards (IFRS) flexibility concerning reporting interest income and expense and dividends received in different sections of the statement of cash flows. This flexibility existed in Taiwan for the first time in 2013, the year that Taiwan switched from its own generally accepted accounting principle to IFRS.Design/methodology/approachUsing 2013 data for a sample of 1,227 firms, 354 of whom changed their reporting classification, this study examined the interaction effect of board independence and partner-level and firm-level auditor industry specialization on the cash flow reporting decision using logistic regression.FindingsThe results show there is a substitute relationship between board independence and partner-level industry specialization on the change in cash flow reporting classification, but a complementary relationship between board independence and firm-level auditor specialization. Further, both partner-level and firm-level auditor industry specializations have a complementary (but negative) relationship with board independence as to whether the firm is likely to report interest expense paid in the operating or financing activities sections.Practical implicationsAn important implication is that knowing the levels of audit firm and partner specialization and how independent the board is, is useful for researchers and regulators in investigating auditor-client relationships and understanding the influences of variables investigated here on the outcome(s) of accounting policy and regulatory changes.Originality/valueThis study improved the field’s understanding of the impacts of audit partner and firm specialization, board independence and relevant interactions on cash flow reporting choices.

The Value of Auditor Industry Specialization - Evidence from a Structural Model

This study investigates the value of auditor industry specialization. In the first step, we use a discrete choice model to derive the first-order demand for auditor industry specialization. Our results reveal that clients have a general preference for auditor industry specialization, relating to both audit firm and audit office specialization. Further, we observe that specializations at the audit firm and audit office are substitutes. We also find that larger and more complex clients have a stronger demand for specialization at the audit office but not the audit firm level. In the second step, we use the results from the discrete choice model to quantify the value of auditor industry specialist for clients. We find that the aggregate value of industry specialization for all clients is around 5 million US dollars and that it shapes the audit market as losing it results in the loss of approximately 5% of clients.

Corporate governance and compliance with AAOIFI governance standards by Islamic banks

PurposeThis study aims to examine the effect of the main corporate governance characteristics on compliance with accounting and auditing organisation for Islamic financial institutions’ (AAOIFI) governance standards’ (GSs) disclosure requirements by Islamic banks (IB) that adopt AAOIFIs’ standards in Bahrain, Qatar, Jordan, Oman, Syria, Sudan, Palestine and Yemen.Design/methodology/approachThe sample consists of 486 bank-year observations from 2009 to 2017.FindingsThe findings reveal that compliance with AAOIFIs’ GSs’ disclosure requirements is positively influenced by the audit committee (AC) independence, AC’s accounting and financial expertise and industry expertise, auditor industry specialisation, IB’s size and IB’s listing status. On the other hand, it is negatively influenced by the ownership concentration.Research limitations/implicationsThis study has only examined compliance with AAOIFI’s GSs’ disclosure requirements and has focussed on one major sector of the Islamic financial institutions (which is IB).Practical implicationsThe findings are useful for various groups of preparers and users of IBs’ annual reports such as academics and researchers, accountants, management of IBs and some organisations.Originality/valueWhile the study of the AAOIFIs’ standards has grown contemporary with considerable contributions from scholars, however, the majority of these studies are descriptive in nature. Indeed, the existing literature that has explored the determinants of compliance with AAOIFI’s standards is in the early research stage. To the best of the knowledge, there is a paucity of empirical research testing this issue.

Do seasoned industry specialists provide higher audit quality? A re-examination

The purpose of this paper is to re-examine the recent findings in Gaver and Utke (2019) (GU) who find that seasoned industry specialist auditors provide higher audit quality. We first illustrate how the magnitude of residuals from the accruals model can vary significantly by industry, thus highlighting the importance of including industry fixed effects when the dependent variable is discretionary accruals. We next replicate GU’s findings. We first attempt to replicate prior literature after including industry fixed effects in the audit quality (discretionary accruals) models. This is an important control, as the relevant benchmark for a firm with an industry specialist auditor is a peer firm in the same industry with a non-specialist auditor. We find that after including industry fixed effects, there is no association between seasoned industry specialist auditors and discretionary accruals. We also find that the association between industry specialization and discretionary accruals is very sensitive to the way in which the researcher calculates specialization. Our findings are informative for shareholders of public companies who vote on auditor ratification.

Accounting comparability and the value relevance of earnings and book value

AbstractThe value relevance of financial statements is of great significance to investors and standard setters. The present research examines whether accounting comparability among industry peers enhances the value relevance of earnings and book value. This is an important question because both the Financial Accounting Standards Board and the Securities Exchange Commission seek greater comparability in financial reporting. However, there is limited empirical evidence on how comparability affects the value relevance of accounting information in the United States. Our results show that accounting comparability increases the value relevance of earnings, but not book value. That is, when firms exhibit greater accounting comparability vis‐à‐vis industry peers, investors attach higher value to reported earnings. In terms of economic significance, the value relevance of earnings is 25.2% higher when accounting comparability is higher by one standard deviation. However, the incremental benefits of accounting comparability are attenuated when financial reporting opacity is high or when there exists an internal control material weakness over financial reporting. In contrast, comparability benefits are enhanced when an industry specialist auditor is employed. Our results are robust to using different model specifications.

Analisis Spesialisasi Industri Auditor dan Penerapan IFRS Terhadap Audit Report Lag pada Perusahaan Manufaktur di Indonesia

This study aims to determine the effect of Auditor Industry Specialization and Adoption of IFRS on Audit Report Lag which the Company size, and Loss as control variables. Manufacturing companies listed on the Indonesia Stock Exchange in 2014-2018 as sample population. This research used a purposive sampling technique as the sampling method. The number of samples was 103 companies for 5 years. The results show that the adoption of IFRS has a positive effect on Audit report lag. Whereas Auditor industry specialization has no effect on Audit report lag.

The Effect of Auditor Industry Specialization and Board Independence on the Cash Flow Reporting Classification Choices under IFRS

This study explores the relationship between audit partner and firm industry specialization and board of director independence on the one hand and the decision by Taiwanese firms to take advantage of IFRS flexibility concerning reporting interest income and expense, and dividends received in the operating cash flow section of the statement of cash flows on the other. A sample of 1,227 Taiwanese firms were drawn for fiscal year 2013, the year that Taiwan switched from using its GAAP to using IFRS principles. Of these, 354 changed their cash flow reporting classifications. We examine the interaction effect of board independence and auditor industry specialization at both partner-level and firm-level on the cash flow reporting classification choices under IFRS. The results show there is a substitute relationship between board independence and partner-level industry specialization on the change in cash flow reporting classification, but a complementary relationship between board independence and firm-level auditor specialization. Further, both partner-level and firm-level auditor industry specialization have a complementary relationship with board independence in not changing a firm’s interest expense paid reported in operating activities to financing activities.

Industry Specialist Auditor and Client Firms’ Real Earnings Management

This study investigates whether industry specialist auditors restrict the use of excessive real earnings management which is performed through the adjustment of timing or magnitude of real business activities. Auditing standards require auditors to use industry-specific knowledge during auditing process. Indeed, accounting firms recently put great effort into enhancing industry expertise, highlighting the importance of industry specialty in maintaining high audit quality. Therefore, industry specialist auditors may effectively hinder clients from engaging in the real earnings management as they do in relation to client’s accruals-based earnings management. On the other hand, although they tend to constrain clients from engaging in accruals-based earnings management, they may not pay much attention to the real earnings management since restricting real earnings management is not under auditors’ direct jurisdiction. Thus, it is not clear whether industry specialist auditors influence the magnitude of clients’ real earnings management. Using Korean data, we find that clients of industry specialist auditors tend to rely less on real earnings management than those of non-industry specialist auditors. This suggests that industry specialist auditors limit clients‘ use of opportunistic real earnings management as they do for the accrual-based earnings management.

PENGARUH SPESIALISASI INDUSTRI AUDITOR DAN MEKANISME CORPORATE GOVERNANCE TERHADAP INTEGRASI LAPORAN KEUANGAN (PERUSAHAAN SEKTOR INFRASTRUKTUR, UTILITAS DAN TRANSPORTASI TERDAFTAR DI BEI TAHUN 2016-2018)

ABSTRAK
 Laporan keuangan yang disajikan dengan adil, jujur dan tidak bias akan membentuk informasi yang bebas dari manipulasi, tidak menyesatkan, dan tidak menimbulkan kerugian kepada pengguna laporan keuangan. Laporan keuangan akan dipandang memiliki integritas tinggi jika memenuhi kualitas keandalan dan kualitas lain sesuai dengan PABU. Hal tersebut merupakan suatu penyusunan yang jujur dan dapat diandalkan sehingga menjadi dasar bagi pengguna untuk proses pengambilan keputusan. Tujuan penelitian ini adalah untuk mengetahui pengaruh variabel independen terhadap variabel dependen baik secara simultan dan parsial. Variabel independen terdiri dari spesialisasi industri auditor, komite audit, kepemilikan institusional dan kepemilikan manajerial sedangkan variabel dependen adalah integritas laporan keuangan. Populasi dalam penelitian ini adalah perusahaan sektor infrastruktur, utilitas dan transportasi yang terdaftar di BEI pada tahun 2016-2018 dengan metode purposive sampling sebanyak 117 perusahaan. Dalam penelitian ini menggunakan metode analisis deskriptif dan data panel dengan menggunakan software E-Views 10. Berdasarkan hasil pengujian variabel spesialisasi industri auditor, komisaris independen, komite audit, kepemilikan institusional dan kepemilikan manajerial berpengaruh secara simultan terhadap integritas laporan keuangan. Lalu secara parsial kepemilikan institusional berpengaruh negatif terhadap integritas laporan keuangan. Sedangkan variabel spesialisasi industri auditor, komisaris independen, komite audit dan kepemilikan manajerial tidak berpengaruh secara parsial terhadap integritas laporan keuangan.
 Kata Kunci : Spesialisasi Industri Auditor, Komisaris Independen, Komite Audit, Kepemilikan Institusional, Kepemilikan Manajerial.

Does Auditor Industry Specialization Increase Analysts’ Forecast Accuracy? Evidence from the Listed Firms of Australia

This paper examines the relation between auditor industry specialization and analysts’ beginning-of-the-year earnings forecast accuracy. It predicts that the higher industry specialization of the auditors will improve the quality of external financial reports and thus mitigates the analysts’ forecast error. It also predicts that higher audit quality will have a negative association with analyst forecast dispersion. The empirical test results on Australian listed firms from the year 2003 to 2012 does not find evidence of association between audit firm industry specialization and analysts’ beginning-of the year earnings forecast error. However, firms with higher analysts forecast error is associated with lower forecast dispersion among analysts, which is consistent with the prediction that analysts are consistent with predicting future earnings and analysts possess similar traits in terms of difference with the actual earnings. Additional analysis also finds that’s larger firms have less forecast errors compared to smaller firms. The findings contribute to the growing literature on auditing and financial reporting quality in Australian context.