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

• In Event: Decisions and informational judgements and their effects on a company's results
  In Paper Session: Decisions and Informational Judgements and Their Effects on a Company's Results

Abstract

Prior research suggests 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 magnitude and timing of reported losses. My findings reveal that client firms engaging Big 4 industry specialist auditors record more frequent and larger asset impairments relative to client firms engaging less specialized Big 4 auditors. Further, this positive relation exists when accounting standards and economic factors suggest that impairments are more likely to occur. Overall, this study provides evidence that auditor expertise plays an important monitoring role in the enforcement of complex accounting standards.

Author

• Sarah E Stein, Virginia Tech