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economic consequences of auditor industry specialization

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Date Issued:
2006
Summary:
This paper examines the association between the employment of industry specialist auditors, and the degree of information asymmetry and the cost of debt of a client company. Unlike auditors without industry expertise, auditors with industry expertise can better improve the credibility of financial statements (Krishnan 2003; Balsam et al. 2003) and verify management forecasts, thereby minimizing management's discretion in applying accounting principles and standards (Kwon 1996). This suggests that industry specialist auditors can enhance audit quality. Consequently, clients of industry specialist auditors are expected to achieve more significant economic benefits than clients of nonspecialist auditors. Based on product differentiation theory and signaling theory, it is hypothesized in this study that clients of industry specialist auditors are more likely to enjoy a lower level of information asymmetry and a lower cost of debt than clients of nonindustry specialist auditors. In addition, this study hypothesizes that the marginal economic value added by auditor industry specialization varies between financially troubled clients and financially healthy clients that seek external financing. The results indicate that clients of specialists experience a lower information asymmetry level than clients of nonspecialists. This economic value provided by specialists is important and more pronounced for unregulated firms than for regulated firms. This inference, however, does not hold when information asymmetry is measured using analyst forecast dispersion. In addition, clients hiring specialists enjoy better credit ratings and lower cost of debt than clients of nonspecialists, and this economic value is more significant for financially troubled firms than for financially healthy firms. However, these findings do not hold for each proxy of auditor industry specialization.
Title: The economic consequences of auditor industry specialization.
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Name(s): Almutairi, Ali R.
Florida Atlantic University, Degree grantor
Skantz, Terrance R., Thesis advisor
Dunn, Kimberly, Thesis advisor
Type of Resource: text
Genre: Electronic Thesis Or Dissertation
Date Issued: 2006
Publisher: Florida Atlantic University
Place of Publication: Boca Raton, Fla.
Physical Form: application/pdf
Extent: 161 p.
Language(s): English
Summary: This paper examines the association between the employment of industry specialist auditors, and the degree of information asymmetry and the cost of debt of a client company. Unlike auditors without industry expertise, auditors with industry expertise can better improve the credibility of financial statements (Krishnan 2003; Balsam et al. 2003) and verify management forecasts, thereby minimizing management's discretion in applying accounting principles and standards (Kwon 1996). This suggests that industry specialist auditors can enhance audit quality. Consequently, clients of industry specialist auditors are expected to achieve more significant economic benefits than clients of nonspecialist auditors. Based on product differentiation theory and signaling theory, it is hypothesized in this study that clients of industry specialist auditors are more likely to enjoy a lower level of information asymmetry and a lower cost of debt than clients of nonindustry specialist auditors. In addition, this study hypothesizes that the marginal economic value added by auditor industry specialization varies between financially troubled clients and financially healthy clients that seek external financing. The results indicate that clients of specialists experience a lower information asymmetry level than clients of nonspecialists. This economic value provided by specialists is important and more pronounced for unregulated firms than for regulated firms. This inference, however, does not hold when information asymmetry is measured using analyst forecast dispersion. In addition, clients hiring specialists enjoy better credit ratings and lower cost of debt than clients of nonspecialists, and this economic value is more significant for financially troubled firms than for financially healthy firms. However, these findings do not hold for each proxy of auditor industry specialization.
Identifier: 9780542559747 (isbn), 12191 (digitool), FADT12191 (IID), fau:9098 (fedora)
Collection: FAU Electronic Theses and Dissertations Collection
Note(s): College of Business
Thesis (Ph.D.)--Florida Atlantic University, 2006.
Subject(s): Financial services industry--Auditing
Corporations--Auditing
Total quality management
Organizational effectiveness--Measurement
Held by: Florida Atlantic University Libraries
Persistent Link to This Record: http://purl.flvc.org/fcla/dt/12191
Sublocation: Digital Library
Use and Reproduction: Copyright © is held by the author with permission granted to Florida Atlantic University to digitize, archive and distribute this item for non-profit research and educational purposes. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder.
Use and Reproduction: http://rightsstatements.org/vocab/InC/1.0/
Host Institution: FAU
Is Part of Series: Florida Atlantic University Digital Library Collections.