Inter-Industry Variation in the Relation between Abnormal Accruals & Audit Engagement Life Expectancy
Journal of Law and Financial Management, Vol. 10, No. 1, pp. 34-49, June 2011
21 Pages Posted: 12 Aug 2011
Date Written: August 12, 2011
Lustgarten and Shon (2011) exploit a hazard model to examine the determinants of the expected remaining length (i.e. life expectancy) of audit engagements. Their main finding is that the life expectancies of audit engagements decrease when firms make relatively large positive or large negative abnormal accruals, but such life expectancies increase with relatively modest abnormal accruals. In this study, I examine the inter-industry variation in this relation across 48 different industry classifications (Fama and French, 1997). Audit engagement life expectancies for six industries (Apparel, Automobiles and Trucks, Electrical Equipment, Miscellaneous, Pharmaceutical Products, Retail) are found to be particularly sensitive to large negative abnormal accruals Similarly, five industries (Banking, Fabricated Products, Real Estate, Rubber and Plastic Products, Wholesale) are sensitive to large positive abnormal accruals. Lastly, three industries (Communication, Precious Metals, Transportation) are sensitive to both negative and positive accruals. These findings help inform auditors, client firms and industry regulators that are more susceptible to contentious disagreements that may arise during audit engagements.
Keywords: finance, law, audit
JEL Classification: M40, M41
Suggested Citation: Suggested Citation