The Association between Big 6 Auditor Industry Expertise and the Asymmetric Timeliness of Earnings

Abstract

The accounting profession is facing a credibility crisis precipitated by the failure of several high-profile companies and the alleged failure of their auditors to detect and persuade their clients to recognize economic losses in earnings in a timely fashion. Investors, regulators, analysts, and the public are interested in identifying factors that enhance the timeliness of earnings, particularly about bad news. This study provides empirical evidence on one such factor—auditors' industry expertise. Using a large sample of clients of Big 6 auditors, this research examines the association between auditor industry expertise, measured in terms of an industry's share in the auditor's portfolio of client industries, and the speed with which publicly available bad news about future cash flows is recognized in earnings. The findings indicate that the earnings of clients of specialist auditors are more timely in reflecting bad news than earnings of clients of nonspecialist auditors. This finding is consistent with the notion that auditors' industry expertise moderates the tendency of auditees to delay the recognition of economic losses in earnings.

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