The Effect of Audit Firm Specialization on Earnings Management and Quality of Audit Work

Hegazy, M. Al Sabagh, A. and Handy, R. (2015). "The effect of audit firm specialization on earnings management and quality of audit work". Journal of Accounting and Finance, Vol. 15 (4), pp.143-164

23 Pages Posted: 28 Jan 2016

See all articles by Mohamed A. Hegazy

Mohamed A. Hegazy

Department of Accounting, The American University in Cairo

Ahmed Al Sabagh

Cairo University

Rasha Hamdy

Cairo University

Date Written: October 27, 2015

Abstract

This paper aims at investigating the effect of industry specialization on the audit quality and earnings quality. It examines the relation between industry specialization and earnings quality, financial reporting quality, and audit quality. The research posits that industry specialization constrains earnings management. In addition, it hypothesized a positive relationship between industry specialization and financial reporting quality. An experiment was conducted in an audit firm with international affiliation in Egypt to test the research hypotheses. The results indicate that there is no significant difference between industry specialist auditors and non-specialists in constraining earnings management. In addition, findings support that financial reporting quality was significantly higher when specialists conducted the audit. The results provide empirical evidence consistent with the hypothesis that auditor with industry specialization improves audit quality. Finally, industry specialization enables auditors to realize the amendments in auditing standards better than non-specialists.

Keywords: Audit industry specialization, Audit quality, Earnings quality, financial reporting quality

JEL Classification: M41

Suggested Citation

Hegazy, Mohamed A. and Al Sabagh, Ahmed and Hamdy, Rasha, The Effect of Audit Firm Specialization on Earnings Management and Quality of Audit Work (October 27, 2015). Hegazy, M. Al Sabagh, A. and Handy, R. (2015). "The effect of audit firm specialization on earnings management and quality of audit work". Journal of Accounting and Finance, Vol. 15 (4), pp.143-164. Available at SSRN: https://ssrn.com/abstract=2723531

Mohamed A. Hegazy (Contact Author)

Department of Accounting, The American University in Cairo ( email )

6 Boulos Hanna Street
Dokki
Cairo
Egypt
0020101699301 (Phone)
0020237600215 (Fax)

Ahmed Al Sabagh

Cairo University ( email )

Orman
Giza
Egypt

Rasha Hamdy

Cairo University ( email )

Orman
Giza
Egypt

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