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

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

《Advances in Quantitative Analysis of Finance and Accounting》 19期 (2022/12) Pp. 25-63

https://doi.org/10.6293/AQAFA.202212_(19).0002

摘要

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.

關鍵字

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

參考文獻

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