Audit Partner Industry Specialization and Earnings Quality of Privately-Held Companies

Abstract:     
Utilizing the Finnish setting, this paper examines the association between industry specialization of an individual audit partner and the quality of earnings reported for privately-held companies. Rules in Finland require that the name(s) of the audit engagement partner(s) appear in audit reports. This makes it possible to construct client portfolios in the audit market of privately- and publicly-held Finnish companies for an individual audit partner, and to identify audits by industry-leader audit partners. The results suggest that industry specialization of the audit partner is associated positively with the quality of earnings reported by private companies. Specifically, private companies audited by industry-leader audit partners (based on aggregate client sales) report lower levels of discretionary accruals, compared to other private companies. This result obtains across Big 4 and non-Big 4 partners, as well as across smaller and larger client companies. The results imply that industry specialization by the audit partner is a source for variation of audit quality in the relatively low auditor-litigation setting of privately-held companies.

Number of Pages in PDF File: 23

Keywords: auditor industry specialization, audit partner, earnings quality, discretionary accruals, privately-held companies

JEL Classification: M42

working papers series