IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v77y2024i2s0165410123000939.html
   My bibliography  Save this article

Auditor industry range and audit quality

Author

Listed:
  • Dekeyser, Simon
  • He, Xianjie
  • Xiao, Tusheng
  • Zuo, Luo

Abstract

We develop the concept of auditor industry range as the extent to which an auditor has experiences in auditing clients from different industries, and we link this construct to auditor performance, drawing on prior research in psychology and cognitive science. We find that auditors with a wide range of industry experiences are more likely to require audit adjustments than auditors with a narrow range. We conduct an extensive set of analyses to mitigate the concern that our results are driven by endogenous matching between auditors and clients. The positive relation between auditor industry range and audit adjustments exists regardless of whether the industries covered by an auditor's portfolio exhibit strong or weak economic co-movement, and the relation is stronger for more complex clients, in more uncertain environments, and for auditors with more years of audit experience. Overall, our findings suggest that an auditor's diverse experiences in different industries can enhance audit quality.

Suggested Citation

  • Dekeyser, Simon & He, Xianjie & Xiao, Tusheng & Zuo, Luo, 2024. "Auditor industry range and audit quality," Journal of Accounting and Economics, Elsevier, vol. 77(2).
    • Handle: RePEc:eee:jaecon:v:77:y:2024:i:2:s0165410123000939
    DOI: 10.1016/j.jacceco.2023.101669
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410123000939
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2023.101669?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lennox, Clive & Wang, Zi-Tian & Wu, Xi, 2018. "Earnings management, audit adjustments, and the financing of corporate acquisitions: Evidence from China," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 21-40.
    2. Solomon, I & Shields, MD & Whittington, OR, 1999. "What do industry-specialist auditors know?," Journal of Accounting Research, Wiley Blackwell, vol. 37(1), pages 191-208.
    3. Jacquemin, Alexis P & Berry, Charles H, 1979. "Entropy Measure of Diversification and Corporate Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 27(4), pages 359-369, June.
    4. Nolder, Christine J. & Kadous, Kathryn, 2018. "Grounding the professional skepticism construct in mindset and attitude theory: A way forward," Accounting, Organizations and Society, Elsevier, vol. 67(C), pages 1-14.
    5. Christine E. Earley, 2002. "The Differential Use of Information by Experienced and Novice Auditors in the Performance of Ill†Structured Audit Tasks," Contemporary Accounting Research, John Wiley & Sons, vol. 19(4), pages 595-614, December.
    6. W. Robert Knechel & Lasse Niemi & Mikko Zerni, 2013. "Empirical Evidence on the Implicit Determinants of Compensation in Big 4 Audit Partnerships," Journal of Accounting Research, Wiley Blackwell, vol. 51(2), pages 349-387, May.
    7. Libby, Robert & Luft, Joan, 1993. "Determinants of judgment performance in accounting settings: Ability, knowledge, motivation, and environment," Accounting, Organizations and Society, Elsevier, vol. 18(5), pages 425-450, July.
    8. Marianne Bertrand & Antoinette Schoar, 2003. "Managing with Style: The Effect of Managers on Firm Policies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1169-1208.
    9. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    10. K. Hung Chan & Donghui Wu, 2011. "Aggregate Quasi Rents and Auditor Independence: Evidence from Audit Firm Mergers in China," Contemporary Accounting Research, John Wiley & Sons, vol. 28(1), pages 175-213, March.
    11. Antoinette Schoar & Luo Zuo, 2017. "Shaped by Booms and Busts: How the Economy Impacts CEO Careers and Management Styles," The Review of Financial Studies, Society for Financial Studies, vol. 30(5), pages 1425-1456.
    12. Hanlon, Michelle & Shroff, Nemit, 2022. "Insights into auditor public oversight boards: Whether, how, and why they “work”," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    13. Lennox, Clive & Wu, Xi & Zhang, Tianyu, 2016. "The effect of audit adjustments on earnings quality: Evidence from China," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 545-562.
    14. Lennox, Clive & Wu, Joanna Shuang, 2022. "A review of China-related accounting research in the past 25 years," Journal of Accounting and Economics, Elsevier, vol. 74(2).
    15. Feng Chen & Songlan Peng & Shuang Xue & Zhifeng Yang & Feiteng Ye, 2016. "Do Audit Clients Successfully Engage in Opinion Shopping? Partner‐Level Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 54(1), pages 79-112, March.
    16. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August.
    17. Tan, HT & Libby, R, 1997. "Tacit managerial versus technical knowledge as determinants of audit expertise in the field," Journal of Accounting Research, Wiley Blackwell, vol. 35(1), pages 97-113.
    18. Lennox, Clive & Wang, Chunfei & Wu, Xi, 2023. "Delegated leadership at public accounting firms," Journal of Accounting and Economics, Elsevier, vol. 76(1).
    19. Custódio, Cláudia & Ferreira, Miguel A. & Matos, Pedro, 2013. "Generalists versus specialists: Lifetime work experience and chief executive officer pay," Journal of Financial Economics, Elsevier, vol. 108(2), pages 471-492.
    20. Ulrike Malmendier, 2021. "Experience Effects in Finance: Foundations, Applications, and Future Directions [X-capm: an extrapolative capital asset pricing model]," Review of Finance, European Finance Association, vol. 25(5), pages 1339-1363.
    21. Antoinette Schoar & Luo Zuo, 2016. "Does the Market Value CEO Styles?," American Economic Review, American Economic Association, vol. 106(5), pages 262-266, May.
    22. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    23. King, Gary & Nielsen, Richard, 2019. "Why Propensity Scores Should Not Be Used for Matching," Political Analysis, Cambridge University Press, vol. 27(4), pages 435-454, October.
    24. DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
    25. Paul Oyer, 2006. "Initial Labor Market Conditions and Long-Term Outcomes for Economists," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 143-160, Summer.
    26. Mariassunta Giannetti & Guanmin Liao & Xiaoyun Yu, 2015. "The Brain Gain of Corporate Boards: Evidence from China," Journal of Finance, American Finance Association, vol. 70(4), pages 1629-1682, August.
    27. Kinney, William Jr. & McDaniel, Linda S., 1989. "Characteristics of firms correcting previously reported quarterly earnings," Journal of Accounting and Economics, Elsevier, vol. 11(1), pages 71-93, February.
    28. Chen, Jie & Lasfer, Meziane & Song, Wei & Zhou, Si, 2021. "Recession managers and mutual fund performance," Journal of Corporate Finance, Elsevier, vol. 69(C).
    29. Paul Oyer, 2008. "The Making of an Investment Banker: Stock Market Shocks, Career Choice, and Lifetime Income," Journal of Finance, American Finance Association, vol. 63(6), pages 2601-2628, December.
    30. Kenneth J. Reichelt & Dechun Wang, 2010. "National and Office‐Specific Measures of Auditor Industry Expertise and Effects on Audit Quality," Journal of Accounting Research, Wiley Blackwell, vol. 48(3), pages 647-686, June.
    31. Chen†Lung Chin & Hsin†Yi Chi, 2009. "Reducing Restatements with Increased Industry Expertise," Contemporary Accounting Research, John Wiley & Sons, vol. 26(3), pages 729-765, September.
    32. Uwe Frey & Richard G. M. Morris, 1997. "Synaptic tagging and long-term potentiation," Nature, Nature, vol. 385(6616), pages 533-536, February.
    33. Daniel Aobdia & Saad Siddiqui & Andres Vinelli, 2021. "Heterogeneity in expertise in a credence goods setting: evidence from audit partners," Review of Accounting Studies, Springer, vol. 26(2), pages 693-729, June.
    34. Ho, Daniel E. & Imai, Kosuke & King, Gary & Stuart, Elizabeth A., 2007. "Matching as Nonparametric Preprocessing for Reducing Model Dependence in Parametric Causal Inference," Political Analysis, Cambridge University Press, vol. 15(3), pages 199-236, July.
    35. Ulrike Malmendier, 2021. "Experience Effects in Finance: Foundations, Applications, and Future Directions," NBER Working Papers 29074, National Bureau of Economic Research, Inc.
    36. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    37. William R. Kinney & Zoe‐Vonna Palmrose & Susan Scholz, 2004. "Auditor Independence, Non‐Audit Services, and Restatements: Was the U.S. Government Right?," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 561-588, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xingqiang Du, 2019. "Does CEO-Auditor Dialect Sharing Impair Pre-IPO Audit Quality? Evidence from China," Journal of Business Ethics, Springer, vol. 156(3), pages 699-735, May.
    2. Xiong, Hao & Hou, Fei & Li, Hanwen & Wang, Huabing, 2020. "Does rice farming shape audit quality: Evidence from signing auditors level analysis," Economic Modelling, Elsevier, vol. 91(C), pages 403-420.
    3. Kim Ittonen & Karla Johnstone & Emma-Riikka Myllym�ki, 2015. "Audit Partner Public-Client Specialisation and Client Abnormal Accruals," European Accounting Review, Taylor & Francis Journals, vol. 24(3), pages 607-633, September.
    4. Xingqiang Du & Yiqi Zhang & Shaojuan Lai & Hexin Tao, 2024. "How Do Auditors Value Hypocrisy? Evidence from China," Journal of Business Ethics, Springer, vol. 191(3), pages 501-533, May.
    5. Jian Cao & Feng Chen & Julia L. Higgs, 2016. "Late for a very important date: financial reporting and audit implications of late 10-K filings," Review of Accounting Studies, Springer, vol. 21(2), pages 633-671, June.
    6. Jeffrey Pittman & Baolei Qi & Yi Si & Zi-Tian Wang & Chongwu Xia, 2024. "Individual Auditor Social Responsibility and Audit Quality: Evidence from China," Journal of Business Ethics, Springer, vol. 194(1), pages 119-144, September.
    7. Pan, Yue & Shroff, Nemit & Zhang, Pengdong, 2023. "The dark side of audit market competition," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    8. Donelson, Dain C. & Ege, Matthew & Imdieke, Andrew J. & Maksymov, Eldar, 2020. "The revival of large consulting practices at the Big 4 and audit quality," Accounting, Organizations and Society, Elsevier, vol. 87(C).
    9. Wu, Bin & Wu, Yaqian & Zhang, Min & Li, Jiyuan, 2024. "Opening the black box of human resource allocations in audit firms: The assignment of audit partners to audit engagements," The British Accounting Review, Elsevier, vol. 56(2).
    10. Tong, Lijing & Wu, Bin & Zhang, Min, 2022. "Do auditors’ early-life socioeconomic opportunities improve audit quality? Evidence from China," The British Accounting Review, Elsevier, vol. 54(2).
    11. Chen, Jie & Lasfer, Meziane & Song, Wei & Zhou, Si, 2021. "Recession managers and mutual fund performance," Journal of Corporate Finance, Elsevier, vol. 69(C).
    12. Hou, Fei & Liu, Jie & Pang, Tingyun & Xiong, Hao, 2020. "Signing auditors’ foreign experience and audit pricing," Economic Modelling, Elsevier, vol. 91(C), pages 300-312.
    13. Johnson, Elizabeth & Reichelt, Kenneth J. & Soileau, Jared S., 2018. "No news is bad news: Do PCAOB part II reports have an effect on annually inspected firms’ audit fees and audit quality?," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 106-126.
    14. Yangyang Chen & Jun Huang & Ting Li & Jeffrey Pittman, 2022. "It's a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 60(3), pages 901-963, June.
    15. Thomas C. Omer & shelley@unl.edu & Frances M. Tice, 2020. "Do Director Networks Matter for Financial Reporting Quality? Evidence from Audit Committee Connectedness and Restatements," Management Science, INFORMS, vol. 66(8), pages 3361-3388, August.
    16. Jeffrey L. Hoopes & Kenneth J. Merkley & Joseph Pacelli & Joseph H. Schroeder, 2018. "Audit personnel salaries and audit quality," Review of Accounting Studies, Springer, vol. 23(3), pages 1096-1136, September.
    17. Blank, D. Brian & Hadley, Brandy, 2021. "When CEOs adapt: An investigation of manager experience, policy and performance following recessions," Journal of Corporate Finance, Elsevier, vol. 71(C).
    18. Vlad‐Andrei Porumb & Abe De Jong & Carel Huijgen & Teye Marra & Jan Van Dalen, 2021. "The Effect of Auditor Style on Reporting Quality: Evidence from Germany," Abacus, Accounting Foundation, University of Sydney, vol. 57(1), pages 1-26, March.
    19. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    20. Beatriz García Osma & Belén Gill de Albornoz Noguer & Elena De las Heras Cristobal, 2016. "Opinion shopping: Partner versus firm-level evidence," Working Papers. Serie EC 2016-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

    More about this item

    Keywords

    Industry range; Audit quality; Audit adjustment; Experience; Cognitive entrenchment;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:77:y:2024:i:2:s0165410123000939. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.