Article2002

Auditor Industry Specialization and Fraudulent Financial Reporting

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Auditing, Earnings Management, Governance Accounting and Financial Management Corporate Governance and Financial Management

Abstract

ABSTRACT: Standard setters and quasi-regulatory bodies have long suggested that industry knowledge results in higher quality audits, and there is evidence that accounting firms are placing increasing emphasis on industry specialization. Audits performed by industry specialist audit firms are likely to be of a higher quality, potentially due to industry-specific expertise possessed by the audit team and/or the audit firm. In this study, we examine the relation between auditor industry specialization and fraudulent financial reporting. We expect a lower incidence of fraudulent financial reporting when the auditor is an industry specialist. We measure industry specialization by computing audit firm market share using both continuous and dichotomous measures of specialization. We find strong support for a negative relation between auditor industry specialization and client financial fraud.

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References

1983Limited-dependent and qualitative variables in econometrics 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1981Auditor size and audit quality 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*1997An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud 1998The Effect of Audit Quality on Earnings Management*1984Methodological Issues Related to the Estimation of Financial Distress Prediction Models 1989An analysis of intertemporal and cross-sectional determinants of earnings response coefficients

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2019Internal auditors’ perceptions of the function’s ability to investigate fraud 2009Evidence from the United States on the Effect of Auditor Involvement in Assessing Internal Control over Financial Reporting 2008Financial Reporting Quality and Investor Protection: A Global Investigation 2015The Effect of Audit Firm Specialization on Earnings Management and Quality of Audit Work 2013

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