ABSTRACT

We argue that the association between auditor industry specialization and audit quality depends on how long the auditor has been a specialist. We measure audit quality using absolute discretionary accruals, income-increasing discretionary accruals, and book-tax differences. Our results, based on a sample of Big 4 audit clients from 2003–2015, indicate that auditors who have only recently gained the specialist designation produce a level of audit quality that does not surpass that produced by non-specialist auditors, and is generally lower than the audit quality produced by seasoned specialists. We estimate that the seasoning process takes two to three years. In contrast to prior research that finds no effect of specialization after propensity score matching, we find that seasoned specialists generally produce higher-quality audits than other auditors even after matching. This suggests that the audit quality effect associated with seasoned industry specialist auditors is not due to differences in client characteristics.

JEL Classifications: M42.

Data Availability: Data used in this study are available from public sources identified in the text.

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