SEC Enforcement Releases and Audit Fees

SEC Enforcement Releases and Audit Fees

SEC Enforcement Releases and Audit Fees

Introduction

Are industry-specialist auditors affiliated with a smaller incidence of fraudulent financial reporting than are non-specialists? Standard setters and quasi-regulatory bodies have long proposed that commerce information outcomes in higher quality audits (e.g., AICPA [1983, 1997] and Panel on Audit Effectiveness [2000]), and there is clues that accounting companies are putting expanding focus on commerce specialization (Bell et al. [1997] and Hogan and Jeter [1999]). In this study, we analyze the relative between auditor commerce specialization and fraudulent financial reporting. We assess commerce specialization by computing audit firm market share utilising both relentless and dichotomous assesses of specialization. We recognise examples of fraudulent financial reporting by reading SEC Accounting and Auditing Enforcement issues handed out between 1990 and 1998 that supposed a violation of Rule 10(b)-5 of the 1934 Securities Exchange Act. Audits presented by commerce expert audit companies are probable to be of a higher quality, possibly due to industry-specific know-how owned by the audit group and/or the audit firm. We thus anticipate a smaller incidence of fraudulent financial reporting when the auditor is an commerce specialist. We find powerful support for a contradictory relative between auditor commerce specialization and purchaser financial fraud. We assess commerce specialization at the two-digit SIC cipher grade founded on income dollars audited, asset dollars audited, and utilising a assess that considers both income and asset dollars audited. Furthermore, we use three distinct classification schemes: (1) if the audit firm has the largest market share in the commerce, (2) if the firm has a market share of 20 per hundred or more, and (3) a relentless assess of the firm's market share. The balance of the paper is coordinated as follows. Section 2 presents farther backdrop and presents our hypothesis. The study conceive seems in Section 3, encompassing the statistical form, variable estimation, and facts and numbers sources. Section 4 talks about experiment selection. Results pursue in Section 5. The last part comprises a abstract, a consideration of the study's limitations, and proposals for future research.

 

2. Background and Hypothesis

QUALITY-DIFFERENTIATED AUDIT SERVICES

The extant publications proposes that bigger audit companies, especially Big Six companies, and industry-specialist auditors are probable to supply quality-differentiated services. DeAngelo [1981] contends that bigger audit companies have a larger buying into in status capital and, in alignment to defend their buying into, these companies are probable to supply higher quality audits. Palmrose [1988] finds a smaller incidence of litigation contrary to Big Eight auditors than contrary to non-Big Eight auditors.

Becker et al. [1998] find that purchasers of Big Six companies report a smaller grade of incomeincreasing discretionary accruals than manage purchasers of non-Big Six firms. Moreover, Francis, Maydew, and Sparks [1999] find that purchasers of Big Six companies report lesser unconditional grades of discretionary accruals than manage purchasers of non-Big Six firms. These investigations, amidst other ones, propose that Big Six auditors are quality-differentiated suppliers of auditing services. Unlike investigations analyzing the Big Six / non-Big ...