||The Effects of Auditor Current and Past Industry Experience on Client Earnings Quality: Evidence from China
||Department of Accountancy
auditor industry experience
Chinese audit market
This paper investigates the effects of auditor current and past industry experience on client earnings quality. We propose that auditors industry experience should be accumulated across time, and that the common measure of auditor industry specialization employed in previous studies may over-emphasize current industry experience while neglect the importance of past industry experience. To test our hypothesis, we use data from China where engaged audit firm and auditors are required to sign the audit report, and measure client earnings quality as the absolute value of discretionary accruals. Our sample consists of 8,571 firm-year observations during 1999 to 2011. We find that client earnings quality increases with auditor industry experience accumulated during the current year and the past three years. We further decompose auditor industry experience into current and past experience, and find that auditor past industry experience has more influential effect on client earnings quality than auditor current industry experience. Our results correspond to call for research on the role of individual auditors and contribute to the literature on auditor industry expertise and to the practice.
1. INTRODUCTION 1
2. BACKGROUND 3
2.1 Chinese Environment of Law and Economy 3
2.2 The Audit Market in China 5
2.3 Industry Specialists 8
3. HYPOTHESIS 12
3.1 Effect of the Accumulated Industry Audit Experience on the Audit Quality 12
4. RESEARCH DESIGN 13
4.1 Measuring Earnings Management 13
4.2 Empirical Models 14
4.3 Test Variables 16
4.4 Sample Selection and Data 17
5. RESULTS OF HYPOTHESIS TESTS 20
5.1 Multivariate Analysis 21
6. CONCLUSION 27
Chinese Reference 29
English References 29
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