Audit Partner Public-Client Specialization and Client Abnormal Accruals
52 Pages Posted: 26 Feb 2014
Date Written: January 13, 2014
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: Suggested Citation