This study has been supported by a research grant from the School of Accounting and Finance, the Hong Kong Polytechnic University, Kowloon, Hong Kong, and we thank the University for this Support. Comments from participants at the Seminar Series at the Hong Kong Polytechnic University are gratefully acknowledged. Helpful comments and suggestions from anonymous referees are also gratefully acknowledged. We thank anonymous referees for helpful and valuable comments which have improved the quality and readability of this article.
Auditor Industry Specialization, Political Economy and Earnings Quality: Some Cross-Country Evidence
Version of Record online: 6 JAN 2012
© 2012 Blackwell Publishing Ltd
Journal of International Financial Management & Accounting
Volume 23, Issue 1, pages 23–61, Spring 2012
How to Cite
Jaggi, B., Gul, F. A. and Lau, T. S. C. (2012), Auditor Industry Specialization, Political Economy and Earnings Quality: Some Cross-Country Evidence. Journal of International Financial Management & Accounting, 23: 23–61. doi: 10.1111/j.1467-646X.2011.01053.x
- Issue online: 6 JAN 2012
- Version of Record online: 6 JAN 2012
- School of Accounting and Finance, the Hong Kong Polytechnic University
Using cross-country data, we evaluate the impact of investor protection on the association between earnings quality and audits by industry specialists. Our findings show that the positive association between industry specialist auditors and earnings quality as documented in the literature is affected by the political electoral system, which reflects investor protection rights in a country. We document that audits by industry specialists are associated with higher earnings quality in countries with the proportional electoral system, reflecting weak investor protection. Our results also confirm Kwon et al.'s findings that overall there is a positive association between earnings quality and audits by industry specialists in countries with weak legal enforcement. Our findings, however, indicate that Kwon et al.'s results are valid only for countries with weak investor protection reflected by the proportional electoral system and not for countries with strong investor protection reflected by the majoritarian electoral system. These findings thus suggest that higher earnings quality of firms audited by industry specialists across countries can especially be expected when investor protection is low and legal enforcement is also weak. In addition, our research suggests that future cross-country studies could explicitly consider the role of the political electoral system of a country in evaluating corporate governance, management and accounting issues.