IS ACCOUNTANT INDUSTRY SPECIALIZATION A PANACEA? PERSPECTIVE OF FINANCIAL DISTRESS IN CHINA

10.6293/AQAFA.202212_(19).0002

Wen-Jye Hung；Tsui-Lin Chiang；Yi-Yin Ruan

Auditor Industry Specialization ； Firm Financial Distress ； Audit Quality ； Financial Distress Volatility

Advances in Quantitative Analysis of Finance and Accounting

19期（2022 / 12 / 31）

25 - 63

英文

This study investigates the effects of auditor industry specialization (AIS) on firm financial distress at the audited firm level and individual auditor level. We use 27,501 firm-year observations of the A-share companies listed in Shenzhen Stock Exchange and Shanghai Stock Exchange in China during 2006-2018. We address this issue using two measurements: AIS and Altman's (1968) Z-score model, the latter of which has a precise formula and good practicability that is determined by a high Z-score indicating a low risk of financial distress. We discover a significant positive association between Z-score and AIS at both levels when AIS is measured according to the scale of clients, indicating that high AIS impacts firm financial distress risk. We further document that when AIS is measured according to the number of clients, Z-score and AIS are marginally and positively related at the firm level, but no statistical relationship exists at the individual auditor level. This is due to the industrial characteristics of Chinese accounting firms. Our results remain robust after other determinants of firm financial distress and endogeneity concerns are controlled for. Finally, we test the effect of high AIS on financial distress volatility (FDV) for high-risk companies. We calculate FDV according to the 3-year second moment of Z. When AIS is determined to be high according to the scale of clients, no statistical relationship exists between AIS and FDV. By contrast, when AIS is determined to be high according to number of clients, high AIS is positively related to FDV; thus, higher firm AIS corresponds to higher firm financial distress risk. This is because under the client number measurement, high AIS auditors are non-Big 4 audit firms with audit quality that is acceptable but not outstanding.

1. Shu, P.-G.,Chen, T.-K.,Hung, W.-J.,Hsu, W.-F.(2018).Auditor industry specialization and client cash holdings: an information asymmetry perspective.Advances in Quantitative Analysis of Finance and Accounting,16,147-181.
   連結：
2. Altman, E. I.(1968).Financial ratios, discriminant analysis and the prediction of corporate bankruptcy.The Journal of Finance,23,589-609.
3. Altman, E. I.,Hartzell, J.,Peck, M.(1998).Emerging market corporate bonds-A scoring system.Emerging market capital flows,Boston, MA:
4. Altman, E. I.,Marco, G.,Varetto, F.(1994).Corporate crisis diagnosis: Comparisons using linear discriminant analysis and neural networks (the Italian Experience).Journal of Banking and Finance,18,505-529.
5. Audousset, C. S.(2015).Audit fees in a joint audit setting.European Accounting Review,24,347-377.
6. Balsam, S.,Krishnan, J.,Yang, J. S.(2003).Auditor industry specialization and earnings quality.Auditing: A Journal of Practice & Theory,22(2),71-97.
7. Baskin, J.(1987).Corporate liquidity in games of monopoly power.The Review of Economics and Statistics,69,312-319.
8. Beaver, W.(1966).Financial ratios predictors of failure.Journal of Accounting Research,4,71-111.
9. Becker, C. L.,DeFond, M. L.,Jiambalvo, J.,Subramanyam, K. R.(1998).The effect of audit quality on earnings management.Contemporary Accounting Research,15,1-24.
10. Bedard, J. C.(2012).Discussion of “audit partner specialization and audit fees: Some evidence from Sweden”.Contemporary Accounting Research,29,341-348.
11. Bowen, R. M.,Rajgopal, S.,Venkatachalam, M.(2008).Accounting discretion, corporate governance and firm performance.Contemporary Accounting Research,25,351-405.
12. Causholli, M.,Chambers, D.,Payne, J. L.(2012).Did the combination of pressure on auditors to sell non-audit services, and clients’ willingness to buy future services, result in reduced audit quality?.AAA Annual Meeting,Washington, DC:
13. Chan, S. H.,Martin, J. D.,Kensinger, J. W.(1990).Corporate research and development expenditures and share value.Journal of Financial Economics,26,255-276.
14. Chang, X.,Dasgupta, S.,Hilary, G.(2009).The effect of auditor quality on financing decisions.The Accounting Review,84,1085-1117.
15. Chen, G.-T.,Lan, L.(2004)。操控性應計利潤審計質量的實證比較。Audit & Economy Research，2004(4)，16-19。
16. Choi, J.-H.,Kim, J.-B.,Zang, Y.(2010).Do abnormally high audit fees impair audit quality?.Auditing: A Journal of Practice & Theory,29(2),115-140.
17. DeAngelo, L. E.(1981).Auditor size and audit quality.Journal of Accounting and Economics,3,183-199.
18. DeFond, M.,Zhang, J.(2014).A review of archival auditing research.Journal of Accounting and Economics,58,275-326.
19. Dopuch, N.,Simunic, D.(1980).The nature of competition in the auditing profession: A descriptive and normative view.Regulation and the accounting profession,Belmont, CA:
20. Doyle, J.,Ge, W.,McVay, S.(2007).Determinants of weaknesses in internal control over financial reporting.Journal of Accounting and Economics,44,193-223.
21. Duffie, D.,Lando, D.(2001).Term structures of credit spreads with incomplete accounting information.Econometrica,69,633-664.
22. Dunn, K. A.,Mayhew, B. W.(2004).Audit firm industry specialization and client disclosure quality.Review of Accounting Studies,9,35-58.
23. El Khoury, R.,Al Beaïno, R.(2014).Classifying manufacturing firms in Lebanon: An application of Altman’s model.Procedia-Social and Behavioral Sciences,109,11-18.
24. Eshleman, J. D.,Guo, P.(2014).Do Big 4 auditors provide higher audit quality after controlling for the endogenous choice of auditor?.Auditing: A Journal of Practice & Theory,33(4),197-219.
25. Feng, H.,Habib, A.,Huang, H. J.,Qi, B.-L.(2021).Auditor industry specialization and stock price crash risk: individual-level evidence.Asia-Pacific Journal of Accounting & Economics,28,427-453.
26. Fitzpatrick, P. J. (1932). A comparison of the ratios of successful industrial enterprises with those of failed companies. Washington, DC: The Accountants Publishing.
27. Francis, J. R.,Krishnan, J.(1999).Accounting accruals and auditor reporting conservatism.Contemporary Accounting Research,16,135-165.
28. Francis, J. R.,Maydew, E. L.,Sparks, H. C.(1999).The role of Big 6 auditors in the credible reporting of accruals.Auditing: A Journal of Practice & Theory,18(2),17-34.
29. Gramling, A. A.,Stone, D. N.(2001).Audit firm industry expertise: A review and synthesis of the archival literature.Journal of Accounting Literature,20,1-19.
30. Janes, T. D.(2005).University of Michigan.
31. Jeong, S. W.,Rho, J.(2004).Big Six auditors and audit quality: The Korean evidence.The International Journal of Accounting,39,175-196.
32. Keasey, K.,Watson, R.(1991).Financial distress prediction models: A review of their usefulness.British Journal of Management,2,89-102.
33. Lee, T.-S.,Yeh, Y.-H.(2004).Corporate governance and financial distress: Evidence from Taiwan.Corporate Governance: An International Review,12,378-388.
34. Lobo, G. J.,Zhou, J.(2001).Disclosure quality and earnings management.Asia-Pacific Journal of Accounting & Economics,8,1-20.
35. Mayhew, B. W.,Wilkins, M. S.(2003).Audit firm industry specialization as a differentiation strategy: Evidence from fees charged to firms going public.Auditing: A Journal of Practice & Theory,22(2),33-52.
36. McConnell, J. J.,Muscarella, C. J.(1985).Corporate capital expenditure decisions and the market value of the firm.Journal of Financial Fconomics,14,399-422.
37. Molina, C. A.,Preve, L. A.(2009).Trade receivables policy of distressed firms and its effect on the costs of financial distress.Financial Management,38,663-686.
38. Neal, T. L.,Riley, R. R., Jr.(2004).Auditor industry specialist research design.Auditing: A Journal of Practice & Theory,23(2),169-177.
39. Opler, T. C.,Titman, S.(1994).Financial distress and corporate performance.The Journal of Finance,49,1015-1040.
40. Palmrose, Z.-V.(1986).Audit fees and auditor size: Further evidence.Journal of Accounting Research,24,97-110.
41. Sirois, L.-P., & Simunic, D. A. (2011). Auditor size and audit quality revisited: The importance of audit technology. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1694613
42. Soobratty, W. A. I.(2018).Curtin University.
43. Teoh, S. H.,Wong, T. J.(1993).Perceived auditor quality and the earnings response coefficient.The Accounting Review,68,346-366.
44. Tian, Z. Q.(2020)。會計師事務所審計質量控制探究。Accounting Learning，2020(26)，131-132。
45. Wang, B.,Li, B.,Li, H.(2015).Panda: Public auditing for shared data with efficient user revocation in the cloud.IEEE Transactions on Services Computing,8,92-106.
46. Wang, Y. M.,Wang, P.(2006)。「四大」與「非四大」審計質量市場認同度的差異性研究。Auditing Research，2006(5)，49-56。
47. Yu, F.(2005).Accounting transparency and the term structure of credit spreads.Journal of Financial Fconomics,75,53-84.
48. Yu, P.(2007)。公司特征、國際「四大」與審計意見。Auditing Research，2007(2)，53-60。

1. Yamin Wang,Wen-Jye Hung,Tsui-Lin Chiang,Jian Hua(2022).RELATIONSHIP BETWEEN ABNORMAL AUDIT FEES AND THE EARNINGS RESPONSE COEFFICIENT: AN ANALYSIS OF CHINA'S LISTED COMPANIES.Advances in Quantitative Analysis of Finance and Accounting,19,187-212.