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 nonspecialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of nonspecialists.
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Research Article| September 01 2003
Auditor Industry Specialization and Earnings Quality
Steven Balsam, Professor;
Jagan Krishnan, Associate Professor;
Online ISSN: 1558-7991
Print ISSN: 0278-0380
American Accounting Association
AUDITING: A Journal of Practice & Theory (2003) 22 (2): 71–97.
Steven Balsam, Jagan Krishnan, Joon S. Yang; Auditor Industry Specialization and Earnings Quality. AUDITING: A Journal of Practice & Theory 1 September 2003; 22 (2): 71–97. https://doi.org/10.2308/aud.2003.22.2.71
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