Auditor Industry Specialization, Auditor Changes, and Accounting Restatements

Abstract

SYNOPSIS: The increasing occurrence of accounting restatements has drawn considerable attention from regulators, audit firms, and corporate boards concerning audit and financial statement quality. Research suggests that auditor industry specialization is associated with improved error detection and greater financial statement quality. We examine the impact of auditor industry specialization on a sample of restatement and nonrestatement firms and find that auditor industry specialization is negatively associated with the likelihood of accounting restatement. In addition, focusing on the subset of restatement firms, we find that auditor industry specialization reduces the likelihood of issuing restatements affecting core operating accounts, suggesting that industry specialization adds value in auditing a particularly critical area of the firms’ continuing operations. Finally, we find changing from a nonspecialist to a specialist auditor increases the likelihood of restatement, and changing from a specialist to a nonspecialist reduces the likelihood of restatement. Our findings are consistent with industry specialization enhancing auditors’ role in improving the quality of the financial reporting process, particularly related to the core operations of their clients.

Does a Lack of Choice Lead to Lower Quality?: Evidence from Auditor Competition and Client Restatements

“…In the first model, a change from the 25th to 75th 18 Previous research regarding specialization and the likelihood of restatement is mixed. While both Romanus et al (2008) and Stanley and DeZoort (2007) document a negative relationship between industry specialization and restatements, Stanley and DeZoort (2007) find that this relationship is limited to short-tenure ( three years) auditor-client relationships. Across all tenure lengths, the relationship between industry specialization and restatement is not significant.…”

“…CITY_LEADER and NAT_LEADER are the Fama and French (1997) 48 industry audit market leaders at the MSA and national levels. We include both of these measures because prior literature finds that industry expertise improves audit quality (e.g., Balsam et al 2003;Krishnan 2003;Francis et al 2005;Romanus et al 2008;Reichelt and Wang 2010). BIG4 is an indicator variable that is set equal to 1 if the audit firm is one of the Big 4 audit firms, and 0 otherwise.…”

Pengaruh Ukuran Auditor Dan Spesialisasi Auditor Terhadap Kualitas Laba

“…Peranan auditing dan kualitas audit (audit quality) yang dilakukan oleh Kantor Akuntan The Big 42 dalam memastikan kualitas laba perusahaan telah menjadi sorotan utama, khususnya sejak berkembangnya masalah earning restatement yang dilakukan oleh para manajemen perusahaan serta timbulnya kasus Enron (Defond dan Francis 2005;Jenkins et al 2006;Romanus et al 2008). Studi di Amerika telah membuktikan adanya penurunan dalam earning quality pada akhir tahun 1990an serta mempertanyakan peran efektifitas auditing dalam menghambat penurunan dalam kualitas laba (Jenkins et al 2006).…”

“…Penelitian Behn et al (2008) mendukung temuan-temuan penelitian sebelumnya bahwa auditor The Big 5 dengan spesialisasi industri memiliki kualitas audit yang lebih tinggi dari auditor The Big 5 tanpa spesialisasi industri, ditunjukkan dengan keakuratan 'analysts ' earning fo reca st' yang lebih tinggi. Penelitian Romanus et al (2008) juga memberi bukti bahwa auditor dengan spesialisasi industri memiliki asosiasi dengan peningkatan deteksi kesalahan yang lebih tinggi, memiliki kualitas pelaporan keuangan yang lebih tinggi, dan memiliki kecenderungan yang lebih rendah dalam menerbitkan accounting restatement dari klien mereka.…”

“…

Abstract

Prior research had documented that The Big 4 auditors have higher audit quality than non-Big 4 auditors (Teoh and Wong 1993), and The Big 4 auditors with industry specialization have higher audit quality than The Big 4 auditors without specialization (Balsam et al 2003;Knechel et al 2007;Behn et al 2008;Romanus et al 2008

…”