The effects of audit firm and partner industry specialisation and corporate governance on audit quality and earnings quality

  • Khairul Mohd Kharuddin

Student thesis: Doctoral ThesisDoctor of Philosophy


This PhD thesis examines two empirical issues. Firstly, the study examines the effects of industry specialist auditors and corporate governance on audit quality. Secondly, the study investigates the effects of industry specialist auditors and corporate governance on earnings quality. These two empirical research questions are examined under three different level of analysis for auditor industry specialisation: 1) the firm national-city framework, 2) the partner national-city framework, and 3) the joint firm-partner national-city framework. The corporate governance characteristics examined in this thesis are female directorship, foreign directorship, internal audit function, and audit committee characteristics relating to size, independence, expertise and activity. Audit quality in this study, is measured by the variation in the level of audit effort, as reflected in audit fees. The earnings quality measures examined in this study are the client’s level of discretionary accruals, accrual estimation error and likelihood of reporting a profit (or avoiding a loss). The study’s sample includes initially all companies listed in the London Stock Exchange (LSE) between 2008 and 2011. The findings from the first empirical study suggest that the audit partner industry leadership at the national level drives the fee premium for auditor industry specialisation in the U.K., above and beyond the audit firm industry leadership. Nevertheless, the evidence that non-industry leading partners within the industry leading audit firms are still able to charge a fee premium indicates that some form of knowledge sharing and transfer of industry expertise do exists between the partners within the Big 4 audit firms. In addition, the results also suggests that foreign directors and active audit committee demand additional and extensive audit effort from their auditor in order to certify their monitoring function, resulting in the charging of higher audit fees. Next, the findings from the second empirical enquiry suggest that audit firm industry leadership plays a more important role than audit partner industry leadership in promoting higher earnings quality, as evidenced by lower discretionary accruals, lower accrual estimation error and lower likelihood of reporting a profit. In addition, the study also finds that the female directors, audit committee independence, and audit committee’s accounting or financial expertise contribute to accruals manipulation. This finding is interesting given the data is tested in the period during and following on the 2007/2008 global financial crisis, suggesting that some corporate governance mechanisms may be less effective in constraining earnings management, but somehow the effect is moderated by the presence and the role of industry specialist auditors. Overall, the empirical findings on auditor industry specialisation seem to support the product differentiation theory, given the consistent evidence between fee premium and higher earnings quality offered by industry specialist auditors. The findings from the corporate governance analyses are consistent with the institutional theory and/or the managerial hegemony theory, as the role of board is viewed to be passive and more of ceremonial in nature during the sample period investigated. The thesis’s findings are of potential interest to policy makers, practitioners and investors as the issues relating to audit quality, earnings quality and corporate governance are pertinent for investor protection in the financial market.
Date of Award29 Jun 2016
Original languageEnglish
SupervisorIlias Basioudis (Supervisor)


  • auditor industry
  • specialisation
  • corporate governance
  • United Kingdom
  • audit quality
  • earnings quality

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