감사파트너 산업전문성과 감사품질

This study examines the relationship between industry specialization measured at the engagement partner level and audit quality proxied by the performance matched absolute discretionary accruals, and the absolute value of the residuals from the Dechow and Dichev (2002) accruals model as modified by McNichols (2002). Since previous studies demonstrate that audit firm level industry specialization is positively associated with audit quality, our analysis incorporates industry specialization identified at the engagement partner level as well as the audit firm level; using this specification, we can investigate the joint effect of industry specialization at two potentially different but related levels. Industry specialist auditors are auditors whose training and experience are largely concentrated in a particular industry and are, therefore, believed to possess a comprehensive understanding of a company’s characteristics. Understanding the influence of engagement partner industry specialization is important because the demonstration of auditor expertise is a major demand in all client audit requests for proposals. Auditor industry specialization not only at the partner-level but also at the audit firm-level and the global-level is arguably the most critical attribute that partners emphasize during the bidding process to procure an audit engagement. However, most existing research on auditor industry specialization to date has concentrated primarily on the audit firm–level (or office-level) investigation leaving the effect of industry specialization at the engagement partner-level largely unexplored. Understanding the effect of the engagement partner level industry specialization on audit quality is important for several reasons. Recently both practitioners and regulators have begun to be interested in understanding the role of engagement partners on audit quality. More specifically, the Public Company Accounting oversight Board (PCAOB) in the U.S. in 2011 suggested that partner name disclosure could be a useful means to improve auditor independence and audit quality. Similarly, several countries in European Union (EU) already mandate audit partner name disclosure as part of effort to enhance audit quality. Notwithstanding such interests, our understanding concerning the relation between engagement partners and audit quality is relatively primitive in part due to the lack of data on audit partner names. Thus, our work is expected to add some useful insights into this important relationship. Our results suggest that industry specialization at the engagement partner level is systematically related to audit quality measured by several conventional proxies of audit quality. More specifically, audit quality proxied by the absolute value of discretionary accruals is significantly lower than that of non-specialist partners. However, this finding is valid only when the audit firm to which the engagement partner belongs also specializes in that same industry. That is, industry specialization at the engagement partner level alone does not lead to an improvement in audit quality at least in the Korean audit markets during the period of our investigation. The results using the absolute residuals are largely similar to those from the absolute discretionary accruals. That is, audit quality measured by the absolute residuals from the McNichols model is negatively associated with partner industry specialization, consistent with the interpretation that partner industry specialization can lead to an improved audit quality. Our findings are robust across several different definitions of engagement partner industry specialization. In particular, the results are qualitatively similar when partner industry specialization is defined as the top five partners in the industry in terms of total assets of the clients or market shares based on client sales and the partners who audit two or more clients in the industry and lastly partner’s industry-specific tenure. Since auditor selection is unlikely to be random, it is important to control for the endogeneity embedded in the auditor selection process. We attempt to control for the endogeniety using the propensity score matching method. Moreover, in order to examine the sensitivity of our results to the inclusion or exclusion of individual Big 4 audit firms, we redo the main analysis by dropping each Big 4 audit firm one at a time. Irrespective of these differences, our results remain qualitatively unaffected. Further, we find that industry specialization at the engagement partner level is negatively associated with errors in financial reporting, which provides additional support to our interpretation. Our work has several contributions to the related literature. First, our work is the first in Korea that examines the systematic relationship between industry specialization calculated at the engagement partner level and audit quality and reports the significant positive association between them. Second, our findings add to a branch of research that examines the role and effect of engagement partner on audit quality by providing additional evidence concerning the effect of partner industry specialization on audit quality. Third, our study provides additional insights into the effect of audit firm industry specialization on audit quality. Given that the results in prior studies that examine the relationship between audit firm industry specialization and audit quality are mixed in Korea, our findings also contribute to further understand their relationship.