Auditor Industry Specialization and Earnings Quality

2003 ◽  
Vol 22 (2) ◽  
pp. 71-97 ◽  
Author(s):  
Steven Balsam ◽  
Jagan Krishnan ◽  
Joon S. Yang
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
Discretionary Accruals ◽  
Prior Work ◽  
Brand Name ◽  
Absolute Level ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of nonspecialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of nonspecialists.

scholarly journals Legal Systems and Earnings Quality: The Role of Auditor Industry Specialization

2007 ◽  
Vol 26 (2) ◽  
pp. 25-55 ◽  
Author(s):  
Soo Young Kwon ◽  
Chee Yeow Lim ◽  
Patricia Mui-Siang Tan
Keyword(s):  
Earnings Quality ◽  
Legal Environment ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response ◽  
International Setting ◽  
Using Data ◽  
The Impact ◽  
Industry Specialist

This paper extends prior studies in auditor industry specialization to an international setting and examines if the impact of industry specialist auditors on earnings quality is dependent on the legal environments. Using data for 28 countries over 20 industries from 1993 to 2003, we find that clients of industry specialist auditors have lower discretionary current accruals and higher earnings response coefficients than clients of nonspecialist auditors. In addition, we find that the impact of auditor industry specialization on earnings quality increases as the legal environment weakens. Collectively, the results suggest that the benefits from engaging the services of industry specialist auditors increase as a country's legal environment shifts from a strong to a weak environment. Our results are robust to the inclusion of additional control variables.

Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings

2014 ◽  
Vol 90 (5) ◽  
pp. 1939-1967 ◽  
Author(s):  
Carol Callaway Dee ◽  
Ayalew Lulseged ◽  
Tianming Zhang
Keyword(s):  
Audit Quality ◽  
Market Reaction ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Multivariate Model ◽  
Significant Decline ◽  
Earnings Response Coefficients ◽  
Absolute Value ◽  
Earnings Response ◽  
First Time

ABSTRACT We empirically test whether audit quality is affected when part of an SEC issuer's audit is outsourced to auditors other than the principal auditor (“participating auditors”). We find a significantly negative market reaction and a significant decline in earnings response coefficients (ERCs) for experimental issuers disclosed for the first time as having participating auditors involved in their audits. However, we find no market reaction and no decline in ERCs for a matching sample of issuers that are not disclosed as using participating auditors, nor for issuers disclosed for the second or third time as using participating auditors. We also find actual audit quality as measured by absolute value of performance-matched discretionary accruals is lower for the experimental issuers, although we find no difference in audit fees paid by the experimental and matching issuers in a multivariate model. Our findings suggest that the PCAOB's proposed rule requiring disclosure of the use of other auditors in addition to the principal auditor would provide information useful to investors in assessing audit quality for SEC issuers.

Audit Quality and Specialist Tenure

2018 ◽  
Vol 94 (3) ◽  
pp. 113-147 ◽  
Author(s):  
Jennifer J. Gaver ◽  
Steven Utke
Keyword(s):  
Propensity Score ◽  
Propensity Score Matching ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Data Availability ◽  
Client Characteristics ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Big 4 ◽  
Jel Classifications

ABSTRACT We argue that the association between auditor industry specialization and audit quality depends on how long the auditor has been a specialist. We measure audit quality using absolute discretionary accruals, income-increasing discretionary accruals, and book-tax differences. Our results, based on a sample of Big 4 audit clients from 2003–2015, indicate that auditors who have only recently gained the specialist designation produce a level of audit quality that does not surpass that produced by non-specialist auditors, and is generally lower than the audit quality produced by seasoned specialists. We estimate that the seasoning process takes two to three years. In contrast to prior research that finds no effect of specialization after propensity score matching, we find that seasoned specialists generally produce higher-quality audits than other auditors even after matching. This suggests that the audit quality effect associated with seasoned industry specialist auditors is not due to differences in client characteristics. JEL Classifications: M42. Data Availability: Data used in this study are available from public sources identified in the text.

Auditor Tenure and Perceptions of Audit Quality

2005 ◽  
Vol 80 (2) ◽  
pp. 585-612 ◽  
Author(s):  
Aloke Ghosh ◽  
Doocheol Moon
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Earnings Response Coefficients ◽  
Information Intermediaries ◽  
Auditor Tenure ◽  
Earnings Response ◽  
One Year ◽  
Reported Earnings

We analyze how investors and information intermediaries perceive auditor tenure. Using earnings response coefficients from returns-earnings regressions as a proxy for investor perceptions of earnings quality, we document a positive association between investor perceptions of earnings quality and tenure. Further, we find that the influence of reported earnings on stock rankings becomes larger with extended tenure, although the association between debt ratings and reported earnings does not vary with tenure. Finally, we find that the influence of past earnings on one-year-ahead earnings forecasts becomes greater as tenure increases. In general, our results are consistent with the hypothesis that investors and information intermediaries perceive auditor tenure as improving audit quality. One implication of our study is that imposing mandatory limits on the duration of the auditor-client relationship might impose unintended costs on capital market participants.

Was Andersen’s audit quality lower than its peers?

2015 ◽  
Vol 30 (8/9) ◽  
pp. 911-962 ◽  
Author(s):  
Krishna Kumar ◽  
Lucy Lim
Keyword(s):  
Big Five ◽  
Design Methodology ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Content Type ◽  
Earnings Response Coefficients ◽  
Going Concern ◽  
Lower Likelihood ◽  
Earnings Response ◽  
Pooled Samples

Purpose – This paper aims to examine whether Andersen’s audit quality in the five years preceding its collapse lagged that of other Big-Five auditors. Design/methodology/approach – This paper compares Andersen’s audit quality and the other Big-Five auditors using five methodologies, namely, earnings response coefficients, magnitudes of abnormal accruals, propensities to issue going-concern opinions, usefulness of going-concern opinions in predicting bankruptcy and the frequency of Accounting and Auditing Enforcement Releases. The comparisons are based on both pooled samples of all observations and propensity-score-based matched-pairs. Findings – The preponderance of evidence shows that Andersen’s audit quality did not differ materially in audit quality from other Big-Five auditors prior to its failure. However, it was found that Andersen’s independence was compromised in the year leading to its collapse (2000), as indicated by the lower likelihood to issue going-concern opinions. Originality/value – This paper complements and improves on Cahan et al. (2011) by using more measures of audit quality, as no one measure is perfect, showing that their results using discretionary accruals are sensitive to the model used and showing that there is a more powerful direct measure of audit quality, namely, going-concern opinions.

How Increased Regulatory Oversight of Nonaudit Services Affects Investors' Perceptions of Earnings Quality

2012 ◽  
Vol 32 (1) ◽  
pp. 85-112 ◽  
Author(s):  
Aasmund Eilifsen ◽  
Kjell Henry Knivsflå
Keyword(s):  
Audit Quality ◽  
Data Availability ◽  
Negative Effects ◽  
Regulatory Oversight ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Audit Firms ◽  
Earnings Response ◽  
Nonaudit Services ◽  
The Relationship

SUMMARY In 2003, the Financial Supervisory Authority of Norway (FSA) disclosed that audit firms had violated the legal restrictions for providing nonaudit services (NAS). In response, the FSA tightened the NAS regulations. This study examines how regulatory oversight affects the relation between the provision of NAS and earnings response coefficients (ERC). For small, non-industry specialized audit firms, the disclosure of violations in 2003 negatively affected the relationship between NAS and ERC, but the effect was more pronounced in the disclosure year 2003 than in the new regulation period 2004–2008. For Big 5 audit firms, these negative effects are moderated, indicating higher audit quality. Contrary to our expectations, the results of this study suggest that investors perceive audit firm industry specialization as a threat to independence in 2003. Data Availability: Data are publicly available from the listed sources.

How does reciprocal rent-seeking between politicians and auditors influence audit quality? - Evidence from China

2021 ◽  
Author(s):  
Ku He ◽  
Xiaofei Pan ◽  
Gary Gang Tian ◽  
Yanling Wu ◽  
Chun Cai
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Rent Seeking ◽  
Political Connections ◽  
Chinese Market ◽  
Earnings Response Coefficients ◽  
Capital Costs ◽  
Study Results ◽  
Earnings Response ◽  
Audit Opinions

In this study, we propose a reciprocal rent-seeking game between politicians and individual auditors with political connections, and examine how these auditors' political connections influence their audit quality. Using hand-collected data from the Chinese market from 2008 to 2013, we find that politically connected auditors have a significantly lower tendency to issue modified audit opinions (MAOs). In addition, we also find that politicians' career prospects are significantly adversely influenced by MAOs being issued in their jurisdictions, while auditors' political connections enable them to charge higher audit fees, acquire larger market share, and reduce the likelihood of encountering regulatory sanctions. Further evidence suggests that compared with their non-connected counterparts, the politically connected auditors tend to issue less accurate audit opinions, reduce client firms' earnings response coefficients (ERCs), and increase client firms' capital costs. Collectively, our study results suggest that individual auditors' political connections facilitate the reciprocal rent-seeking activities between these auditors and politicians, which ultimately undermines audit quality.

Audit Committee Director-Auditor Interlocking and Perceptions of Earnings Quality

2014 ◽  
Vol 33 (4) ◽  
pp. 41-70 ◽  
Author(s):  
Jeng-Fang Chen ◽  
Yan-Yu Chou ◽  
Rong-Ruey Duh ◽  
Yu-Chen Lin
Keyword(s):  
Audit Committee ◽  
Positive Relationship ◽  
Earnings Quality ◽  
Earnings Response Coefficients ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Financial Expertise ◽  
Earnings Response ◽  
Reported Earnings ◽  
Positive Effect

SUMMARY: Using earnings response coefficients (ERCs) from returns-earnings regressions as a proxy for investor perceptions of earnings quality, we analyze how investors perceive reported earnings when companies with interlocking audit committee directors are audited by the same audit firm (hereafter, AC director-auditor interlocking). Our empirical results show that the extent of AC director-auditor interlocking is significantly and positively associated with ERCs. By dividing the sample period into pre-Sarbanes-Oxley Act (pre-SOX, 1998 through 2001) and post-SOX (2002 through 2010) periods, we find that the significantly positive effect of AC director-auditor interlocking on ERCs only exists in the post-SOX period, indicating that investors have reacted more positively to AC director-auditor interlocking after the implementation of SOX, which requires that audit committee members be independent. Finally, using financial expertise data for the period 2003 to 2010, we find that the positive relationship between the extent of AC director-auditor interlocking and ERCs is more pronounced when interlocking audit committee directors are financial experts than when they are not financial experts.

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