The Effect of Auditor’s Industry Specialization on the Quality of Financial Reporting of the Listed Companies in Tehran Stock Exchange

Rodabeh Havasi · Roya Darabi

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Auditing, Earnings Management, Governance Corporate Governance and Financial Management Financial Reporting and XBRL

Abstract

This study examines the effect of auditor’s industry specialization on quality of financial reporting of the listed companies in Tehran Stock Exchange during the period of 7 years from 2008 to 2014. It is expected that industry specialist auditors will show more competence and auditing quality in discovering opportunistic behavior in executives and most probably they will report financial statements to maintain their reputation; in other words, it is expected that auditors specialized in industry will have an effective role in corporate governance and improving the quality of financial reporting. In this research, the accurate of predicting future cash flows operations through components of the operation profit was served as a measure for the quality of financial reporting and patters of the market share based on the total audited properties of the company and total auditor income was used as auditor expertise characteristics in that audited unit's industry were used. A total number of 119 companies were selected as samples and using logit regression model, the results were analyzed. The findings suggest that auditor's expertise in the industry, has a direct impact on the quality of corporate financial reporting. In this regard, testing the research's hypotheses showed that the auditor expertise in the industry (on the basis of market share pattern based on auditor's total revenue) has no significant effect on the quality of financial reporting. However, if the auditor expertise in the industry (on the basis of market share pattern based on the sum of the audited assets) was to be measured, it will leave a significant effect on the quality of financial reports. Therefore, it is concluded that the factor of the auditor's expertise in the industry is sensitive in relation with the type of indices used to assess it.

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References

2008The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality 2011Audit firm industry specialization and the audit report lag 2003Are Unmanaged Earnings Always Better for Shareholders?2009Auditor tenure, auditor specialization, and information asymmetry 2009The effect of Enron, Andersen, and Sarbanes‐Oxley on the US market for audit services 2012Auditor industry specialization, board governance, and earnings management 2008Audit Quality, Alternative Monitoring Mechanisms, and Cost of Capital: An Empirical Analysis

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