Auditor Industry Specialization and Earnings Quality

46 Pages Posted: 29 Sep 2003

See all articles by Steven Balsam

Steven Balsam

Temple University - Department of Accounting

Jagan Krishnan

Temple University - Department of Accounting

Joon S. Yang

Sogang University

Abstract

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of non-specialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of non-specialists.

Keywords: industry specialization, discretionary accruals, earnings response coefficient, audit quality

JEL Classification: M41, M43, M49, G12

Suggested Citation

Balsam, Steven and Krishnan, Jagan and Yang, Joon S., Auditor Industry Specialization and Earnings Quality. Auditing: A Journal of Practice & Theory, September 2003. Available at SSRN: https://ssrn.com/abstract=436260 or http://dx.doi.org/10.2139/ssrn.436260

Steven Balsam

Temple University - Department of Accounting ( email )

306 Speakman Hall
Philadelphia, PA 19122
United States
215-204-5574 (Phone)
215-204-5587 (Fax)

HOME PAGE: http://www.sbm.temple.edu/~drb/

Jagan Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Fox School of Business & Management
1801 Liacorous Walk
Philadelphia, PA 19122
United States
215-204-8126 (Phone)
215-204-5587 (Fax)

Joon S. Yang

Sogang University ( email )

1 Shinsu-dong, Mapo-gu
Seoul 121-742
Korea, Republic of (South Korea)
82-2-705-7852 (Phone)
82-2-705-8519 (Fax)

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