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Auditor industry specialization, board governance, and earnings management

Jerry Sun (Odette School of Business, University of Windsor, Windsor, Canada)
Guoping Liu (Ted Rogers School of Management, Ryerson University, Toronto, Canada)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 1 January 2013

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3101

Abstract

Purpose

The purpose of this study is to investigate the interaction effect of auditor industry specialization and board governance on earnings management. This study examines whether board independence is more or less effective in constraining earnings management for firms audited by industry specialists than for firms audited by non‐specialists.

Design/methodology/approach

The US data were collected from the RiskMetrics Directors database and the Compustat database. Regression analysis was used to test the research proposition.

Findings

It was found that earnings management is more negatively associated with board independence for firms audited by industry specialists than for firms audited by non‐specialists, consistent with the notion that there is a complementary relationship between auditor industry specialization and board governance. The findings suggest a positive interaction effect of auditor industry specialization and board governance on accounting quality.

Originality/value

This study contributes to the literature by documenting explicit evidence that high quality boards can be more effective through hiring industry specialist auditors. This study also suggests that it may be worth investigating the interaction effect among different corporate governance mechanisms on accounting quality.

Keywords

Citation

Sun, J. and Liu, G. (2013), "Auditor industry specialization, board governance, and earnings management", Managerial Auditing Journal, Vol. 28 No. 1, pp. 45-64. https://doi.org/10.1108/02686901311282498

Publisher

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Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited