Does Auditor Industry Expertise Improve Audit Quality In Complex Business Environments?

Authors

  • Sansaloni Butar-Butar Faculty of Economics and Business, Soegijapranata Catholic University of Semarang Jl. Pawiyatan Luhur IV/1 Bendan Dhuwur, Semarang 50234
  • Stefani Lily Indarto Lily Indarto Faculty of Economics and Business, Soegijapranata Catholic University of Semarang Jl. Pawiyatan Luhur IV/1 Bendan Dhuwur, Semarang 50234

:

https://doi.org/10.9744/jak.20.1.1-12

Keywords:

Specialist auditor, earnings persistence, industry complexity, financial reports

Abstract

This study examines the role of specialist auditors in enhancing the quality of financial statements by taking into account industry complexity. The test of hypotheses are conducted in two steps. The first step is to provide evidence that earnings quality, measured by earnings persistent, of firms operating in the complex and non-complex industry are different. The second step is to compare the absolute abnormal accruals of companies engaged in the complex industry with those from non-complex industry audited by non-specialist and specialists auditors. Results show: 1) earnings persistence of firms in complex industries are lower than those in non-complex industries. 2) absolute abnormal accruals of firms operating in complex industries are higher than those in non-complex industries regardless industry specialization. Overall, the results suggest that auditor industry expertise does not play a significant role in improving the quality of audited earnings in complex business environ­ment.

References

[1] Bushman, R., Q. Chen, E. Engel, and A. Smith. (2004). Financial accounting information, organizational complexity, and corporate governance systems, Journal of Accounting andEconomics 37: 167-201.

Francis, J.R., and J. L., Gunn. (2015), Industry accounting complexity and earnings properties: does auditor industry expertise matters?, Working Paper, University of Missouri and the University of Pittsburgh.

Doyle, J., W. Ge, and S. McVay. (2007). Determinants of weaknesses in internal control over financial reporting, Journal of Accounting and Economics 44: 193-223.

Plumlee, M., and T. Yohn. (2010), An analysis of the underlying causes attributed to restatements, .Accounting Horizons 24 (1): 41-64.

Dunn, K. A., and B. W. Mayhew. (2004), Audit Firm Industry Specialization and Client disclosure quality, Working paper, Florida Atlantic University and the University of Wisconsin.

Dechow, P., and I. Dichev. (2002), The quality of accruals and earnings: the role of accrual estimation errors, The Accounting Review 77: 35-59.

Balsam, S., J. Krishnan, and J. S. Yang. (2003), Auditor industry specialization and earnings quality, Auditing: A Journal of Practice & Theory 22: 71–97.

Cahan, S., J. Godfrey, J. Hamilton, and D. Jeter. (2008). Auditor specialization, auditor dominance, and audit fees: the role of investment opportunities. The Accounting Review 83 (6): 1393-1423..

Craswell, A., J. Francis, and S. Taylor. (1995), Auditor brand name reputation and industry specialization, Journal of Accounting and Economics 20: 297–322.

Hogan, C. E., and D. C. Jeter. (1999), Industry specialization by auditors, Auditing: A Journal of Practice &Theory 18: 1–17.

Ferguson, A., J.R. Francis., and Stokes. (2003), The effects of firm-wide and office -level industry expertise on audit pricing, The Accounting Review 78 (2): 429-448.

Choi, J.-H., J.B. Kim, A. Qiu, and Y. Zang. (2012), Geographic proximity between auditor and client: how does it impact audit quality?, Auditing: A Journal of Practice and Theory 31 (2): 43-72.

Reichelt, K., and D. Wang. (2010), National and office-specific measures of auditor industry-expertize effects on audit quality, Journal of Accounting Research 48 (3): 647-686.

Setiawan, L.W., dan Fitriany. (2011), Pengaruh workload dan spesialisasi auditor terhadap kualitas audit dengan kualitas komite audit sebagai variabel pemoderasi. Jurnal Akuntansi Keuangan Indonesia 8: 36-53.

Rahadianto, N.A. (2012). Analisis pengaruh auditor spesialis industri, Dewan Komisaris, Komite Audit, dan penerapan PSAK 50/55 (revisi 2006) terhadap audit delay pada industri perbankan. Skripsi yang tidak dipublikasi-kan. Universitas Indonesia.

Senjaya, K., dan B. Suprasto. (2013), Tingkat spesialisasi industri auditor sebagai pemoderasi pengaruh ukuran perusahaan pada audit delay, E-Jurnal Akuntansi, Universitas Udayana.

Nugrahanti, Y. (2014), Pengaruh audit tenure, spesialisasi kantor akuntan publik, dan ukuran perusahaan terhadap kualitas audit, Skripsi yang tidak dipublikasikan, Universitas Diponegoro.

Fitriany, S. Utama, D. Martani, H. Rosietta. (2015), Pengaruh tenur, rotasi, dan spesialisasi Kantor Akuntan Publik (KAP) terhadap kualitas audit: perbandingan sebelum dan sesudah regulasi rotasi KAP di Indonesia, Jurnal Akuntansi dan Keuangan 17 (1): 12-27.

Kusuma, R. W. R dan D.T.H. Manurung. (2016), Pengaruh kualitas audit, tenur audit terhadap audit report lag dengan spesialisasi industri auditor sebagai variabel moderasi, Working paper, Universitas Widyatama, Bandung.

Novianti, Sutrisno, dan G. Irianto. (2012), Tenur kantor akuntan publik, Tenur Partner Audit, Auditor spesialisasi industri, dan kualitas audit, Paper dipresentasikan pada Simposium Nasional Akuntansi XV, Universitas Lambung Mangkurat, Banjarmasin, 20-23 September 2012.

Herusetya, A. (2009), Pengaruh ukuran auditor, dan spesialisasi auditor terhadap kualitas laba. Jurnal Akuntansi dan Keuangan Indonesia 6 (1): 46-70.

Chrisnoventie, D. (2012), Pengaruh ukuran KAP dan spesialisasi industri KAP terhadap kualitas audit: tingkat risiko litigasi perusahaan sebagai variabel moderasi, Skripsi yang tidak dipublikasikan, Universitas Diponegoro.

Wintono, S. D. (2014). Pengaruh tenur audit dan spesialisasi KAP terhadap kualitas audit dengan reputasi KAP sebagai variabel pemoderasi, Skripsi tidak dipublikasi, Universitas Sebelas Mare.

Suresti, A. (2015), Pengaruh workload, auditor spesialisasi industri, dan audit tenure terhadap kualitas audit dengan komite audit sebagai variabel moderating, Skripsi tidak dipublikasi, Universitas Islam Negeri Syarif Hidayatullah Jakarta.

Pertiwi, N.P., A. Hasan., dan Hardi. (2016). Pengaruh masa perikatan audit, spesialisasi industri KAP, reputasi KAP,dan Komite Audit terhadap kualitas audit. Jurnal Akuntansi 4 (2): 147-160.

Duru, A., Reeb, D., (2002), Geographic and industrial corporate diversification: the level and structure of executive compensation, Journal of Accounting Auditing and Finance 17, 1–24.

Denis, D.J., Denis, D.K., Yost, K. (2002), Global diversification, industrial diversification, and firm value, Journal of Finance 57, 1951–1980.

Bodnar, G., Tang, C., Weintrop, J. (1998), Both sides of corporate diversification: the value impacts of geographic and industrial diversification, Working Paper, Wharton School

Owen, A.L., and C. Polk. (2000), Does diversification destroy value? Evidence from industry shocks, Journal of Financial Economics 63: 51-77.

Gilson, S., Healy, P., Noe, C., Palepu, K. (2001), Analyst specialization and conglomerate breakups, Journal of Accounting Research 39, 565–582

Givoly, D., Hayn, C., D'Souza, J. (1999), Measurement errors and information content of segment reporting, Review of Accounting Studies 4(1), 15–43.

Peterson, K. (2012), Accounting complexity and misreporting and the consequences of misreporting, Review of Accounting Studies 17: 72-95.

Danos, P., W. Eichenseher, and D. Holt. (1989), Specialized knowledge and its communication in auditing, Contemporary Accounting Research 6(1): 91-109.

Porter, M.E. (1985), The competitive advantage: Creating and sustaining superior performance, NY: Free Press.

Mayhew, B. W., and M. S. Wilkins. (2003), Audit firm industry specialization as a differentiation strategy: Evidence from fees charged to firms going public, Auditing: A Journal of Theory & Practice 22: 33–52.

Chan, D. K., A. Ferguson, D. A. Simunic, and D. Stokes. (2001), A spatial analysis and test of oligopolistic competition in the market for assurance services, Working paper, University of British Columbia.

Dichev, L.D., J.R. Graham., C.R. Harvey, and S. Rajgopal. (2013), Earnings quality: Evidence from the field, Journal of Accounting and Economics 56: 1-33.

Ferguson, A., and D. Stokes. (2002), Brand name audit pricing, industry specialization and industry leadership premiums post-Big 8 and Big 6 mergers, contemporary accounting Research 19: 77–110..

Simunic, D., and M. Stein. (1987), Product Differentiation in Auditing: Auditor Choice in The Market for Unseasoned New Issues, Vancouver, Canada: Canadian Certified General Accountants’ ResearchFoundation.

Khrisnan, J. and Yang, J.S. (1999), Auditor industry specialization and Earnings Response Coefficient, Working paper, Temple University.

Carcello, J., and A. L. Nagy. (2002), Auditor industry specialization and fraudulent financial reporting, Proceedings of the 2002 Deloitte and Touche/University of Kansas Symposium on Auditing Problems.

Kwon, S.Y., C. Y. Lim., and P.M.S. Tan. (2007), Legal systems and earnings quality: The role of auditor industry specialization, Auditing: A Journal of Practice & Theory 26(2): 25-55.

Krishnan, J. (2003), Does Big 6 auditor industry expertise constraint earnings management?, Accounting Horizons (supplement) 1-16.

Sloan, R. (1996), Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review 71 (3): 289-315.

Kothari, S.P., J. Leone, and C. Wasley. (2005), Performance matched discretionary accruals measures, Journal of Accounting and Economics 39: 163-197.

Ball, R., Shivakumar, L., (2006), Earnings quality in UK private firms: comparative loss recognition timeliness, Journal of Accounting and Economics 39, 83–128.

Dechow, P., Sloan, R., Sweeney, A., (1995), Detecting earnings management. The Accounting Review 70, 193–225.

Kasznik, R., (1999), On the association between voluntary disclosure and earnings management, Journal of Accounting Research 37, 57–81.

Carcello, J., C.W. Hollingsworth., A. Klein., and T. L. Neal. (2007), Audit committee financial expertise, competing for corporate governance mechanism, and earnings management in a Post-Sox World, Working paper, University of Tennessee, Clemson University and New York University.

Downloads

Published

2018-06-28

How to Cite

Butar-Butar, S., & Lily Indarto, S. L. I. (2018). Does Auditor Industry Expertise Improve Audit Quality In Complex Business Environments?. Jurnal Akuntansi Dan Keuangan, 20(1), 1-12. https://doi.org/10.9744/jak.20.1.1-12

Issue

Vol. 20 No. 1 (2018): MAY 2018

Section

Articles

License

Authors who publish with this journal agree to the following terms:

  1. Authors retain the copyright and publishing right, and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
  2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
  3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) followingthe publication of the article, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).<a href="http://creativecommons.org/lice