Auditor Industry Specialization Research Articles

Collusion or supervision? Between auditor and audit firm – tax planning’s perspective

PurposeThis study aims to investigate the impact of auditor industry specialization (AIS) on clients’ tax planning at the audit firm level and individual auditor level, respectively.Design/methodology/approachThe study’s sample consists of 44,637 firm-year observations of Chinese firms listed on the Shenzhen and Shanghai Stock Exchanges during the period from 2002–2020. The data are collected from the Taiwan Economic Journal. Panel regression is used to test hypotheses. Additionally, a two-stage least squares model is used to address concerns about possible endogeneity.FindingsThe relationship between tax planning and AIS is significantly positive at the audit firm level, while it is significantly negative at the individual auditor level.Originality/valueThe authors use manually collected data to investigate the distinct impacts of two AIS metrics on tax planning: the number of clients and the scale of clients.

Layers of Auditor Industry Specialization: Evidence from Client Firms’ Investment Efficiency

ABSTRACT We examine the influence of different layers of auditor industry specialization on client firms’ investment efficiency. We differentiate between industry specialization at the firm and partner levels, and joint specialization (i.e., at both firm and partner levels combined). Using observations from Taiwan between 1998 and 2017, we observe a positive association between joint specialization and client investment efficiency. Specialization at the firm or partner levels alone does not improve investment efficiency. In addition, client firm performance is positively associated with joint specialization. Auditors charge a premium for the firm- and joint-level specialization. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M40; M42.

Public Accounting Firm's Quality Control Standard In Risk-Based Perspective: Is It Important?

Pandemic Covid 19 has impacted every business operation worldwide and increased business risk. Auditors' responsibility to provide audit quality has become more prevalent. This study aims to get empirical evidence of auditor experience, auditor industry specialisation, and audit risk on audit quality during the COVID-19 pandemic. The research methods used quantitative with a survey approach; data gathered by a survey of Auditor. The result finds that during turbulent economic situations, the need for auditor experience and auditor's industry specialists has increased to mitigate the audit risk. Auditor experience and auditor industry specialists were needed to promote audit quality with low audit risk. The study has proved that auditor experience, industry specialisation, and audit risk impact audit quality. Assessing the auditor and public accounting firm using quality control standards from risk-based perspectives is urgently required. Other studies may investigate the issues using qualitative methods to get a deeper understanding.

Analisis Faktor-Faktor Yang Mempengaruhi Intergritas Laporan Keuangan Pada Perusahaan Manufaktur Yang Terdaftar Di Bursa Efek Indonesia

Publication of financial reports as accounting information products produced by the company, cannot be separated from the process of its preparation. The purpose of this study is to find empirical evidence of the influence of the Financial Report Integrity variable on Independent Commissioners, Institutional Ownership, Financial Distress, KAP Reputation and Auditor Industry Specialization. The research method used in this research activity uses the following research characteristics: Mixed Research Method refers to a combination of quantitative and qualitative methods. The population in this study were manufacturing companies for the 2019-2022 period on the Indonesia Stock Exchange. Based on the analysis of variable data, Independent Commissioners partially do not have a significant influence on the integrity of financial reports. Based on data analysis, the institutional ownership variable partially does not have a significant influence on the Integrity of Financial Reports.

Factors Affecting The Integrity of Company Financial Statements

This research aims to test and gather empirical evidence of Factors Affecting the Integrity of the Company's Financial Statements. Factors examined in this study include Audit Committee, Board of Commissioners, Institutional Ownership, Audit Tenure, Auditor Industry Specialization and Financial Distress as independent variables. Meanwhile, the dependent variable is the Integrity of Financial Statements. The sample chosen for this study is Consumer Goods Industry Sector Companies listed on the Indonesia Stock Exchange (IDX) during 2020-2022, then purposive sampling method was implemented as the sampling technique. This study uses secondary data: the company's financial statements and annual reports. The collected data were then analysed by multiple linear regression using Statistical Package for Social Sciences (SPSS) version 22. The study’s findings reveal that the Audit Committee positively affects the integrity of Financial Statements. Meanwhile, the Board of Commissioners, Institutional Ownership, Audit Tenure Auditor Industry Specialization, and Financial Distress do not affect the Integrity of Financial Statements. It is recommended that further research consider adding variables as independent variables, moderating variables or intervention variables that have the potential to increase their influence on the integrity of financial reports.

Peran Spesialisasi Industri Auditor dalam Memoderasi Pengaruh Audit Tenure dan Ukuran KAP terhadap Audit Report Lag

This study aims to determine the role of auditor industry specialization in directing the impact of audit tenure and size of Public Accounting Firm on audit report lag. Sampling was carried out with the aim of purposive sampling. Panel data regression analysis was used to test the hypothesis, and the sample size included 30 energy sector companies listed on the Indonesia Stock Exchange between 2021 and 2023 with outlier data. Based on the findings of this study, audit report lag is significantly affected by auditor industry specialization and tenure, but not by the size of the Public Accounting Firm. While auditor industry specialization does not moderate the effect of Public Accounting Firm size on audit report lag, it does moderate the effect of audit tenure on audit report lag.

CEO inside debt and industry specialist auditor

PurposeThis paper aims to examine the effect of executive compensation incentives, specifically CEO inside debt holdings, on the choice of industry specialist auditor.Design/methodology/approachHigh inside debt holdings are expected to constrain excessive managerial risk-taking and align the interests of managers and outside debtholders. The authors hypothesize that reduced debtholders’ expropriation concerns will decrease the demand for high audit quality, measured by industry specialization. The authors investigate a sample of US firms from 2006 to 2018 using OLS regression and use CEO relative leverage to proxy for CEO inside debt holdings. The authors conduct an additional two-stage least squares regression analysis to address potential endogeneity issues.FindingsThe paper finds that firms with higher levels of CEO inside debt tend not to appoint an auditor with industry specialization. This result is consistent with the notion that inside debt mitigates agency conflicts between managers and debtholders, reducing the demand for high-quality audits as a monitoring mechanism. The paper also finds that among firms which are excessively leveraged, those with higher levels of CEO inside debt tend to appoint an industry specialist auditor.Originality/valueThe findings contribute to the literature on agency cost and auditor choice by demonstrating that CEO inside debt has both substitutive and complementary effects on demand for industry specialist auditors.

Exploring the impact of auditor industry specialization on income smoothing

Since the late 1970s’ reform and opening-up, China’s economy has achieved remarkable success, maintaining an average annual GDP growth of 9.7% from 1978 to 2006. In 2007, China achieved a GDP of 3.38 trillion USD, surpassing Germany to become the world’s third-largest economy, and by the second quarter of 2010, it had become the second-largest economy globally. These developments have attracted international investors’ attention to Chinese equities. However, China’s poor reputation for corporate governance may deter investors, despite their positive outlook on China’s economy. Corporate managers in China are known to engage in income smoothing, taking actions to dampen fluctuations in their firms’ publicly reported net income. In 2004, the OECD proposed that a strong disclosure regime promoting real transparency can help attract capital and maintain confidence in the capital market, with income smoothing being a key concern for both institutional and individual investors. This study investigates how auditor industry specialization (AIS) affects income smoothing behavior in Chinese listed companies. Using a sample of 27,208 firm-year observations from 2006 to 2018 collected from the Taiwan Economic Journal Database, the results indicate that AIS is negatively related to managers’ income smoothing behavior, underscoring the importance of industry expertise in mitigating such practices. Additionally, an independent t-test highlights the difference between Big Four and non-Big Four auditors in influencing client companies’ income smoothing behaviors. The study further demonstrates the significant moderating effect of Big Four auditors on the relationship between accounting firms with top industry expertise and client companies’ income smoothing, reflecting the unique characteristics of the Chinese market. This study verifies the suppressive effect of AIS on firms’ income smoothing and indirectly suggests that governments (or the Chinese Institute of Certified Public Accountants, CICPA) should regularly disclose accounting firms/auditors with industry expertise publicly. This regime can help global investors make informed investment decisions.

Pengaruh Arus Kas Bebas dan Efektivitas Komite Audit Terhadap Kualitas Audit

Good audit quality is an important factor in ensuring the integrity and reliability of an entity's financial reports. This research aims to examine the influence of free cash flow and audit committee effectiveness on audit quality. Free cash flow reflects the availability of financial resources for a company to finance operational and audit activities. Meanwhile, an effective audit committee can ensure adequate oversight of the financial reporting and audit processes. This research uses panel data which includes companies listed on the Indonesia Stock Exchange during the 2018-2022 period. Free cash flow is measured using the ratio of operating cash flow to total assets, while audit committee effectiveness is measured using a composite score that includes the audit committee's independence, expertise and activities. Audit quality is assessed based on proxies such as the size of the public accounting firm, auditor industry specialization, and audit fees. The research results show that free cash flow and audit committee effectiveness have a significant positive influence on audit quality. Companies with high free cash flow tend to have adequate resources to pay higher audit fees, thereby encouraging auditors to carry out a more in-depth and quality audit process. In addition, an effective audit committee can ensure good oversight of the financial reporting and audit process, thereby improving audit quality. These findings provide important implications for companies and regulators in improving audit quality through managing free cash flow and establishing effective audit committees. Future research can explore other factors that influence audit quality and include relevant control variables.

REAL EARNINGS MANAGEMENT AND CASH HOLDING PERFORMANCE: AUDITOR INDUSTRY SPECIALIZATION AS MODERATING VARIABLE

This academic work intends to obtain empirical evidence about the signaling perspective on real earnings management to describe cash holdings. The theoretical contradictions of real earnings management reflect management's opportunistic attitude and optimistic attitude which signifies positive earnings. The research design is a quantitative study with a sample of 216 units of analysis. Secondary research data was obtained from the Indonesian stock exchange for 2019-2021. Multiple linear regression testing results prove that real earnings management gives a positive signal about cash holding. Auditor industry specialization which reflects audit quality is proven to strengthen the relationship between real earnings management and cash holding. This contributes to the realm of signal theory as an alternative explanation of the relationship between real earnings management and cash holding. In addition, the role of industry-specialized auditors is a driving force in strengthening positive signals that reflect alignment between management policies and cash-holding performance.

전문성이 필요한 산업에 속한 피감사기업을 감사하는 산업전문감사인의 감사행태

[Purpose] This study aims to examine the behavior of industry specialist auditors according to industry characteristics. Specifically, this study aims to provide evidence on the audit efficiency of industry specialist auditors by analyzing whether the audit hours and audit fees of industry specialist auditors are differentiated for industries requiring industry specialization designated by the Financial Supervisory Service.
 [Methodology] We used a sample of 19,115 firms and years for Korean listed companies from 2008 to 2020. For the industries requiring specialization, we used the industry groups selected by the Financial Supervisory Service in November 2023 based on the opinions of listed companies and accounting firms.
 [Findings] The results show that, first, industry specialist auditors are associated with higher audit fees and more audit hours on average, but these fees and audit hours are significantly lower for industries designated as requiring industry specialty, which can be interpreted as an audit efficiency. Second, the above association does not appear in the analysis using hourly audit fees, explaining the process by which efficiency gains are passed on to client firms. Third, the relations does not appear in analyses of audit quality measured by the absolute value of performance－matched discretionary accruals, providing further evidence of the efficiency with which audit quality is maintained at lower levels of audit time. These results can be interpreted as indicating that industry specialist auditors perform the audit process efficiently in industries where specialization is essential, and that the benefits of reduced audit efforts are fully passed on to the clients through this efficient audit process.
 [Implications] The contribution of this study is that it provides evidence on the audit efficiency of industry specialist auditors through data that directly manifests the need for specialization while reflecting the perspectives of both audited companies as consumers and accounting firms as suppliers of industry specialization.

경제 불확실성이 감사보고서의 발행을 지연시키는가?

[Purpose]This study examines the relationship between macro－uncertainty and audit report lag. Also, it analyzes whether this relationship manifests differentially when considering audit hours by rank and auditor characteristics. [Methodology]For analysis, we use a sample of listed firms for the period from 2014 to 2019. Audit report lag was proxied by the number of days from the fiscal year－end to the audit report date. Macro－uncertainty was measured using the volatility index VKOSPI provided by KRX. [Findings]The analysis yields the following results. Firstly, it confirms an increase in audit report lag under high uncertainty. This could be interpreted as auditors increasing audit efforts in response to a rise in audit workload under uncertainty. Secondly, the relation between uncertainty and audit report lag becomes more pronounced in subsamples where audit hours put into by junior and senior staff are high. Thirdly, the relationship between uncertainty and audit report is stronger for Big4 and industry specialist auditors. This could be interpreted as auditors with higher reputation risk or litigation risk allocating relatively more audit effort in response to increased audit risks under uncertainty. [Implications]Despite previous research indicating that uncertainty reduces audit fees and audit hours, this study’s results suggest that reduced audit fees or audit hours does not necessarily imply a decrease in audit effort. Our results provide insight to investors and auditors in providing evidence that increased audit report lag may be due to external environmental factors rather than an increase in firm－specific risk factors.

Effect of industry-specialist auditors, auditor's tenure, and auditor's size on the quality of disclosure in the UAE Stock Exchange

Having access to real-world information and accurate data is a key factor in improving auditor performance, which in turn impacts business performance and decision-making. Consequently, this research aims to determine how financial institutions' levels of experience impact the accuracy of the information they disclose. The present statistical population consists of all 127 businesses listed on the United Arab Emirates Stock Exchange. This type of research is categorized as applied studies in relation to the research methods used in the UAE stock market. Using a systematic deletion procedure, 46 companies were chosen based on the study's inclusion criteria. The findings revealed that in the UAE, the quality of financial information disclosure for companies listed on the UAE stock exchange is significantly affected by the auditor's decision-making experience, the duration of their job, and the size of the auditor.

The Effect of The Audit Committee, Auditor Industry Specialization, Earnings Volatility on Audit Report Lag With Company Size as A Moderation Variable

This study aims to examine the effect of Audit Committee, Auditor Industry Specialization, Earnings Volatility on Audit Report Lag with Company Size as a Moderating Variable. This study uses secondary data obtained from financial reports and annual reports. The research population is companies in the Properties and Real Estate sector listed on the Indonesia Stock Exchange (BEI) for the period 2018 - 2022. The data collection method in this study was purposive sampling. The sample that met the criteria was 104 company data for 2018 - 2022. The data analysis method used was a quantitative data analysis method using SPSS version 27 to process the data using multiple linear analysis.The results obtained from this study are that the influence of the audit committee has no effect on Audit Report Lag. Auditor Industry Specialization has no effect on Audit Report Lag. Earnings Volatility has a positive effect on Audit Report Lag. Company size is unable to strengthen the effect of audit committee on Audit Report Lag. Company size is unable to strengthen the effect of Auditor Industry Specialization on Audit Report Lag. Company size is able to weaken the effect of Earnings volatility towards Audit Report Lag

Does Internal Competition among Audit Partners Affect Audit Pricing Decisions?

SUMMARY This study examines whether competitive pressure from peers within a local office (i.e., internal competition) affects audit partners’ audit pricing decisions. Using U.S. audit partner data from 2016 to 2022, we find that audit partners respond to internal competition by charging their clients lower audit fees. The effect is more pronounced for initial audit engagements, in more competitive local audit markets, and when peers share similar personal attributes, such as sex and experience. However, the effect is weaker for industry specialist audit partners. We also find evidence that internal competition is negatively associated with audit quality for non-Big 4 clients. Overall, this study provides initial evidence of the effect of internal competition among audit partners on audit outcomes.

The effect of the new revenue recognition principle (IFRS 15) on financial statement comparability: Evidence from Korea

This study investigates the initial impact of International Financial Reporting Standards (IFRS) 15 by comparing the financial statement comparability of the effective years of its implementation with those of the pre-IFRS 15 periods. Given that private firms are exempt from the IFRS 15 amendment, we use them as the control group for public firms. Specifically, we use Korean firms from 2015 to 2020 and employ a difference-in-differences approach. This study finds an increase in financial statement comparability for public firms after the IFRS 15 application relative to the change of private firms that are not subject to the IFRS 15. We interpret that the enhancement in financial statement comparability is caused by the following two aspects of IFRS 15: discretion reduction effect and harmonization of multiple standards effect. Furthermore, an increase in comparability is greater for firms that are clients of industry-specialist auditors and those that operate in less-competitive industries, unlike their counterparts. We also find that discretionary revenues are lower in the post-IFRS 15 period than in the pre-IFRS 15 period. Overall, the results of this study suggest that IFRS 15 can deliver the outcomes aimed for by regulators, at least during its initial implementation.

Further evidence on non-audit fees: using the context of female directors on audit committees

Purpose This study aims to examine the association between non-audit fees and audit quality by using the context of gender-diverse audit committees. Further, the authors assess whether this link is moderated by industry-specialist auditors. Design/methodology/approach This study used non-financial FTSE-350 firms over the period of seven years. In addition, the authors use ordinary least squares regression to test the research hypotheses. Findings The authors find that female directors on audit committees are negatively related to non-audit fees, suggesting that non-audit fees reduce audit quality. Moreover, the results indicate that industry-specialist auditors positively moderate the link between gender-diverse audit committees and non-audit fees. This suggests that non-audit fees improve audit quality when the auditor is an industry-specialist. Practical implications The study does not support blanket restrictions on non-audit fees. It recommends regulators to consider industry expertise of auditors when devising non-audit fee restrictions. Moreover, the findings of this study have implications for firms aiming to understand whether non-audit fees could be used for enhancing audit quality. Originality/value By using the context of female directors on audit committees, the authors conclusively assess the link between non-audit fees and audit quality. Further, this study provides a more robust evidence on whether industry-specialist auditors affect the relationship between non-audit fees and audit quality.

Do alumni relationships between executive directors and auditors matter for financial reporting quality?

ABSTRACT This paper examines the impact of executive director-auditor Guanxi on Chinese listed firms’ financial reporting quality from 2009 to 2019. We identify Guanxi-connected auditors as those who attend the same university as the client firm directors. Using a fixed-effect model, we provide consistent evidence that alumni ties between auditors and executive directors are positively related to corporate earnings management, indicating that auditors are more willing to trust clients and less likely to challenge their financial reporting decisions. Subsequently, client firms have more incentives to manipulate earnings, and financial reporting quality is reduced. Our study also finds that the positive impact of director-auditor ties on earnings management is greater among non-state-owned enterprises, firms that do not recruit big-four auditors, and those with fewer industry specialist auditors. Our study sheds new light on the impact of Guanxi-connected auditors on financial reporting quality, enhancing our understanding on the role of social ties. Highlights Alumni ties between auditors and executive directors are positively related to earnings management. Such a positive relationship is greater among non-state-owned enterprises. Such a positive relationship is more pronounced for firms that do not recruit big-four auditors. Such a positive relationship is more pronounced for firms with fewer industry specialist auditors.

THE INFLUENCE OF AUDIT TENURE, AUDIT OPINION, KAP REPUTATION AND AUDITOR SWITCH ON AUDIT REPORT LAG WITH AUDITOR INDUSTRY SPECIALIZATION AS A MODERATION VARIABLE

The purpose of this paper is to test and evaluate how much influence Audit Tenure, Audit Opinion, Public Accounting Firm Reputation, Auditor Switching, and Auditor Industry Specialization as moderator variable has on Audit Report Lag. This research uses Indonesian Stock Exchange data as the population of this study and to examine the companies in the food and beverage sector. This research uses quantitative methodology and secondary sources. In 2021, the Indonesian Stock Exchange is expected to list 39 food and beverage companies. The sample size for this study was 22 food and beverage companies and 110 data were used as samplesand was selected using the purposive sampling method. This research utilizes SPSS version 26 (Statistical Package for Social Sciences) for its statistical analytical needs.This reasearch data analysis uses moderated regression analysis.In this research variable such as Audit Tenure, Audit Opinion, Public Accounting Firm Reputation, Auditor Switching, Auditor Industry Specialization and Audit Report Lag’s Indicator was based on previous studies. Audit tenure is measured by the length of the KAP's engagement with the same auditee. Audit Opinion using the nominal ratio of type opinion given. Public Accounting Firm Reputation indicator’s wheter a company using Big4 as their auditor or not. Auditor Switching indicator’s if company changing its KAP is given code 1, if not 0. Auditor Industry Specialization using SPEC formulation as the indicator. And for the dependent variable, Audit Report Lag measured in days from the date of the closing of company the book until the date of financial report is published to the public.According to this study, longer audit tenure resulted in longer audit report lag. There is no statistically significant correlation between audit report lag and variables audit opinion, audit firm reputation, or auditor switching. There is a positive and statistically significant relationship between audit tenure and auditor industry specialization as a moderation variable with audit report lag. Auditor industry specialization can not moderate the impact of audit opinion, KAP reputation, and auditor turnover on audit report lag.

Audit committee-auditor interlocking and audit fees: evidence from China

ABSTRACT This paper examines the effect of audit committee-auditor interlocking on the audit fees in a sample of listed Chinese companies from 2005 to 2018. It is found that audit committee-auditor interlocking significantly increases the audit fees, and this positive relationship is more significant in better external governance environments, as measured by the marketization level, legal environment, regulatory intensity, and analyst attention. Further analyses show that the interlocking has a greater positive impact on audit fees when it is caused by the audit committee chair, audit partner, and industry specialist auditor, and when the interlocking companies are operating in the same industry. The interlocking relationship also increases audit quality and reduces the stock price crash risk in which the audit fees play the mediating role. The results suggest that it’s the reputation mechanism that motivates audit committee directors and auditors in interlocking relationships to increase audit fees and audit quality. We provide practical implications for auditors, listed companies, investors, and regulators in aspects of increasing audit fees and audit quality, protecting investors’ interests, and improving the external governance environments.