National and Office-Specific Measures of Auditor Industry Expertise and Effects on Audit Quality

Journal of Accounting Research, Forthcoming

53 Pages Posted: 10 Nov 2009

See all articles by Kenneth John Reichelt

Kenneth John Reichelt

Louisiana State University, Baton Rouge - Department of Accounting

Dechun Wang

Texas A&M University

Date Written: November 5, 2009

Abstract

Our paper examines whether audit quality is higher for industry audit specialists at the national and city-office levels using the framework developed in Ferguson et al. [2003] and Francis et al. [2005]. We find that auditors who are both national and city-specific industry specialists have clients with the lowest abnormal accruals, suggesting that joint national and city-specific industry specialists have the highest audit quality. In addition, we find some evidence that abnormal accruals of firms audited by city-industry specialists alone (without also being national specific industry specialists) are lower than those audited by non-industry specialists. Using alternative measures of audit quality, we find that when the auditor is both a national and a city-specific industry specialist, its clients are less likely to meet or beat analysts’ earnings forecasts by one penny per share and more likely to be issued a going-concern audit opinion. Together these results provide consistent evidence that audit quality is higher when the auditor is both a national and city-specific industry specialist, suggesting that auditors’ national positive network synergies and the individual auditors’ deep industry knowledge at the office level are jointly important factors in delivering higher audit quality.

Keywords: Earnings quality, abnormal accruals, earnings benchmarks, auditor industry expertise, Big 4 accounting firms, modified audit opinions, going-concern audit opinions

JEL Classification: M41, M21

Suggested Citation

Reichelt, Kenneth John and Wang, Dechun, National and Office-Specific Measures of Auditor Industry Expertise and Effects on Audit Quality (November 5, 2009). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1503476

Kenneth John Reichelt

Louisiana State University, Baton Rouge - Department of Accounting ( email )

2821 Business Education Complex
Baton Rouge, LA 70803
United States
225-578-6233 (Phone)

Dechun Wang (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States

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