Do industry specialist auditors enhance accounting quality in the EU? Evidence from the pre-IFRS and mandatory post-IFRS periods

Abstract

Purpose

The purpose of this study is to examine the association between auditor industry specialization and accounting quality in the European Union (EU).

Design/methodology/approach

This study employs a difference-in-differences design and explores audit quality from different industry specialist perspectives and different accounting standard regimes. Specifically, this study examines accounting quality among audits performed by non-industry specialists, EU member country-level industry specialists (EUM-level), EU community-level industry specialists (EUC-level), as well as joint industry specialists.

Findings

This study finds evidence of an improvement in accounting quality among audits performed by non-industry specialists post-IFRS. There is also evidence of an improvement in accounting quality among audits performed by EUC-level industry specialists post-IFRS. In addition, accounting quality among audits performed by EUM-level industry specialists seems to be greater than that of audits performed by non-industry specialists in either the pre-IFRS period or the post-IFRS period. Overall, the mandatory adoption of IFRS in the EU appears to be associated with an improvement in accounting quality among some auditor groups.

Research limitations/implications

Industry specialization and accounting quality are not directly observable constructs; this study inevitably employs proxy measures for both. The findings of this study are location-specific and apply to mandatory IFRS adopters only.

Practical implications

This study informs regulators with respect to the importance of industry specialist auditors and financial reporting quality, particularly within the context of the EU. The findings suggest that industry specialists were a significant accounting quality determinant during the mandatory adoption of IFRS. The findings have implications for regulators in the EU and beyond.

Originality/value

This study is among the first to investigate the impact of auditor specialization on accounting quality in the EU, particularly in connection with the adoption of IFRS.

Citation

Lopez, D.M., Schuldt, M.A. and Vega, J.G. (2022), "Do industry specialist auditors enhance accounting quality in the EU? Evidence from the pre-IFRS and mandatory post-IFRS periods", Asian Review of Accounting, Vol. 30 No. 4, pp. 398-431. https://doi.org/10.1108/ARA-04-2022-0077