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Do Industry Specialist Auditors Enforce More Conservative Recognition of Long-Lived Asset Impairments?

Sat, January 18, 3:45 to 5:15pm, TBA

Abstract

Prior research suggests that managers exhibit strong incentives to hide losses and use unverifiable discretion opportunistically. In this study, I examine whether industry specialist auditors act as a monitoring mechanism by enforcing more conservative recognition of impairment losses. I focus on impairments of long-lived assets, which require implementation of complex accounting standards and involve substantial discretion as to the timing and magnitude of reported losses. Empirical results reveal that client firms engaging industry specialist auditors record more frequent, larger, and timelier asset impairments relative to client firms engaging less specialized auditors. Moreover, the positive relation between industry specialists and asset impairments is stronger during the economic crisis period when auditors face heightened risk. Following the exogenous shock of the crisis, specialist auditors are also more likely to enforce large, one-time write-offs earlier in the crisis period. Overall, this study provides evidence that auditor expertise plays an important monitoring role in the enforcement of complex accounting standards.

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