Audit Partner Public-Client Specialization and Client Abnormal Accruals

52 Pages Posted: 26 Feb 2014

See all articles by Kim Ittonen

Kim Ittonen

Hanken School of Economics - Department of Accounting

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems

Emma-Riikka Myllymäki

Aalto University School of Business

Date Written: January 13, 2014

Abstract

We examine the association of Big 4 audit partners’ public-client specialization with client companies’ audit quality. Using a sample of NASDAQ OMX companies in Finland, we identify the audit partner assigned to each public-client engagement. We expect that partners with greater public-client specialization provide higher quality auditing, since they have likely developed deep domain-specific knowledge and a keen sense of the litigation and reputational risks posed by public clients. In addition, the willingness to resist client pressure likely increases with the number of public clients in the partner’s portfolio because dependence on any one client diminishes, which should help to ensure audit quality. The results show that public-client specialization is negatively associated with abnormal accruals, and this result is attributable to audit partners with three to six public clients. The results of supplemental tests imply that public-client specialization is more important when general auditing experience is lower. Further, the results reveal that in our setting of high-tax and high alignment between financial reporting and tax reporting, greater public-client specialization is particularly associated with smaller income-decreasing abnormal accruals, suggesting that auditors with greater public-client specialization likely recognize the downside reputational implications and achieve audit quality by discouraging tax avoidance.

Keywords: Audit Partner Specialization, Audit Quality, Abnormal Accruals

JEL Classification: M41, M49

Suggested Citation

Ittonen, Kim and Zehms, Karla M. and Myllymäki, Emma-Riikka, Audit Partner Public-Client Specialization and Client Abnormal Accruals (January 13, 2014). European Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2401113

Kim Ittonen (Contact Author)

Hanken School of Economics - Department of Accounting ( email )

FI-00101 Helsinki
Finland

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)

Emma-Riikka Myllymäki

Aalto University School of Business ( email )

Finland

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