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THE ASSOCIATION BETWEEN AUDITOR INDUSTRY SPECIALIZATION AND EARNINGS MANAGEMENT

Authors
Journal
Research in Accounting Regulation
1052-0457
Publisher
Elsevier
Publication Date
Volume
16
Identifiers
DOI: 10.1016/s1052-0457(02)16010-3
Keywords
  • Part Ii: Research Reports

Abstract

Abstract The purpose of this paper is to investigate if clients of industry-specialist auditors are less likely to manage earnings relative to clients of non-specialist auditors. This paper focuses on two specific contexts: (1) when firms are highly leveraged; and (2) when the accrual generating ability of the firm is substantial. Using discretionary accruals as a proxy for earnings management, this study found that there is less earnings management for specialist clients, consistent with industry-specialists constraining earnings management when the accrual generating ability of the firm is substantial. Such an association was not apparent for highly leveraged firms, however. Prior research indicates that the quality of an audit is a function of the size of the auditor. The results of this paper indicate that quality of the audit is partly a function of auditor industry expertise as well. Such an association is, however, context-specific.

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