The governance role of R&D specialist auditors: Evidence from discretionary R&D expenditure

Purpose - This study aims to examine whether auditors who specialize in research and development (R&D) activities help reduce managers’ opportunistic adjustment of R&D expenditure for real earnings management (REM). Design/methodology/approach - Using a sample of US firms during the 2001–2017 period, the authors identify auditors’ R&D specialization as their prior experience of auditing R&D expenses spent by each client’s peers. The authors measure R&D-based REM as the negative deviation from the predicted level of R&D expenditure. Findings - The authors find that clients of R&D specialist auditors are less likely to engage in REM through a discretionary reduction of R&D expenditure. This effect is more pronounced when clients face higher competition, have larger investment opportunities and entail higher audit risks. Practical implications - This study shows that auditors’ specialized knowledge can facilitate stronger monitoring of clients’ real decisions, providing implications for auditors’ knowledge acquisition and transfer in specific types of transactions. Originality/value - This study contributes to the literature by documenting the governance role played by R&D specialist auditors in clients’ real economic decisions. Moreover, the study identifies R&D as a distinct area of auditor specialization.