Relevance versus Reliability: Industry Specialist Auditors and Accrual Informativeness

• In Event: Auditor Expertise

Abstract

This study examines the relation between auditor industry expertise and the predictive ability of accruals for future cash flows, distinguishing between the ability of accruals to capture industry-wide and firm-specific information. Prior studies find that industry specialist auditors are associated with lower discretionary accruals and conclude that earnings quality is higher for firms audited by an industry specialist. We find that industry specialist auditors are associated with less informative accruals, suggesting that the lower discretionary accruals observed by prior studies might come at the expense of lower informativeness, as industry specialists force their clients to conform to industry norms. Consistent with this argumentation we find evidence of lower informativeness for the firm-specific component, but not the industry-wide component of accruals. In addition, our cross-sectional tests show that the results are concentrated among firms whose activities differ widely from those of their industry peers. Overall, our findings shed new light on the added value of industry specialist auditors and suggest that care should be taken when using industry specialization as a measure of earnings quality.

Authors

• Annelies HK Renders, Universiteit Maastricht

• Britt Smeets, Maastricht University

• Ann Vanstraelen, Universiteit Maastricht

• Patrick Vorst, Universiteit Maastricht