Earnings quality, internal control weaknesses and industry-specialist audits

Earnings quality, internal control weaknesses and industry-specialist audits Previous studies demonstrate that the quality of audit services provided by industry specialist auditors is higher than that of non-specialist auditors (e.g., Reichelt and Wang in J Account Res 48(3):647–686, 2010; Gul et al. in J Account Econ 47:265–287, 2009; Payne in Audit J Pract Theory 27(2):109–136, 2008; Balsam et al. in Audit J Pract Theory 22(2):71–97, 2003; Krishnan in Account Horizons (Supplement):1–16, 2003). Implementation of Section 404 of the Sarbanes–Oxley Act (SOX) presents special challenges to auditors to maintain the credibility of audit services when their clients have internal control weaknesses (ICW). This study examines whether audits of ICW firms by industry-specialists reflect a better earnings quality compared to audits by non-specialists in the post-SOX period. We use the matched pair sample constructed on the basis of propensity score matching process that controls for endogeneity and auditor’s self-selection bias and evaluate earnings quality measured in terms of performance-adjusted discretionary accruals and accruals quality. Our multivariate regression analyses produce evidence that earnings quality of the ICW firms audited by Big 4 industry specialists is higher than that of the ICW firms audited by Big 4 non-specialists. The superior specialist effect is, however, mainly confined to the firms having pervasive company-level control weaknesses. We find inconsequential difference between earnings quality of the firms with account-specific ICW regardless of whether they are audited by specialist and non-specialist auditors. Our additional analyses further show that any earnings quality difference between Big 4 and non-Big 4 clients is mainly attributed to specialist audit services provided by Big 4 auditors. We do not find any earnings quality difference between Big 4 non-specialists and non-Big 4 clients. Collectively, our study shows that in the enhanced regulatory post-SOX period, Big 4 auditors still provide higher quality audits if they have industry expertise, especially in a situation where companies have pervasive company-level control weaknesses. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Earnings quality, internal control weaknesses and industry-specialist audits

Loading next page...
 
/lp/springer_journal/earnings-quality-internal-control-weaknesses-and-industry-specialist-Y20q9kCGvV
Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0431-3
Publisher site
See Article on Publisher Site

Abstract

Previous studies demonstrate that the quality of audit services provided by industry specialist auditors is higher than that of non-specialist auditors (e.g., Reichelt and Wang in J Account Res 48(3):647–686, 2010; Gul et al. in J Account Econ 47:265–287, 2009; Payne in Audit J Pract Theory 27(2):109–136, 2008; Balsam et al. in Audit J Pract Theory 22(2):71–97, 2003; Krishnan in Account Horizons (Supplement):1–16, 2003). Implementation of Section 404 of the Sarbanes–Oxley Act (SOX) presents special challenges to auditors to maintain the credibility of audit services when their clients have internal control weaknesses (ICW). This study examines whether audits of ICW firms by industry-specialists reflect a better earnings quality compared to audits by non-specialists in the post-SOX period. We use the matched pair sample constructed on the basis of propensity score matching process that controls for endogeneity and auditor’s self-selection bias and evaluate earnings quality measured in terms of performance-adjusted discretionary accruals and accruals quality. Our multivariate regression analyses produce evidence that earnings quality of the ICW firms audited by Big 4 industry specialists is higher than that of the ICW firms audited by Big 4 non-specialists. The superior specialist effect is, however, mainly confined to the firms having pervasive company-level control weaknesses. We find inconsequential difference between earnings quality of the firms with account-specific ICW regardless of whether they are audited by specialist and non-specialist auditors. Our additional analyses further show that any earnings quality difference between Big 4 and non-Big 4 clients is mainly attributed to specialist audit services provided by Big 4 auditors. We do not find any earnings quality difference between Big 4 non-specialists and non-Big 4 clients. Collectively, our study shows that in the enhanced regulatory post-SOX period, Big 4 auditors still provide higher quality audits if they have industry expertise, especially in a situation where companies have pervasive company-level control weaknesses.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 14, 2014

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create lists to
organize your research

Export lists, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off