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

Abstract

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

Shon, John, Inter-Industry Variation in the Relation between Abnormal Accruals & Audit Engagement Life Expectancy (August 12, 2011). Journal of Law and Financial Management, Vol. 10, No. 1, pp. 34-49, June 2011 . Available at SSRN: https://ssrn.com/abstract=1908590 or http://dx.doi.org/10.2139/ssrn.1908590

John Shon (Contact Author)

Fordham University ( email )

113 West 60th Street
New York, NY 10019
United States

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