Auditor industry specialization, board governance, and earnings management

Abstract

s="fontstyle0">Purpose – The purpose of this study is to investigate the interaction effect of auditor industry specialization and board governance on earnings management. This study examines whether board independence is more or less effective in constraining earnings management for firms audited by industry specialists than for firms audited by non-specialists. Design/methodology/approach – The US data were collected from the RiskMetrics Directors database and the Compustat database. Regression analysis was used to test the research proposition. Findings – It was found that earnings management is more negatively associated with board independence for firms audited by industry specialists than for firms audited by non-specialists, consistent with the notion that there is a complementary relationship between auditor industry specialization and board governance. The findings suggest a positive interaction effect of auditor industry specialization and board governance on accounting quality. Originality/value – This study contributes to the literature by documenting explicit evidence that high quality boards can be more effective through hiring industry specialist auditors. This study also suggests that it may be worth investigating the interaction effect among different corporate governance mechanisms on accounting quality

Keywords: Auditing - Auditor industry specialization - Board governance - Boards of directors - Earnings management - Governance - United States of America