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Article
Client Size, Auditor Specialization and Fraudulent Financial Reporting
Managerial Auditing Journal (2004)
  • Joseph V. Carcello, University of Tennessee, Knoxville
  • Albert L. Nagy, John Carroll University
Abstract

This study examines the effect that client size has on the relation between industry-specialist auditors and fraudulent financial reporting. Most of the major accounting firms have organized their audit practices along industry lines, reflecting a belief that industry specialization leads to higher quality audits. Furthermore, regulatory bodies and extant research suggests that larger clients have greater bargaining power and are more likely to be able to convince the auditor to acquiesce to aggressive accounting. Also, it may be more difficult for an auditor to possess industry expertise for larger clients who are likely to be more complex and operate in more than one industry. Consistent with previous research, we generally find a significant negative relation between auditor industry specialization and client financial fraud. Also, as expected, the negative relation between auditor industry specialization and financial fraud is weaker for larger clients. This study provides evidence that the positive benefits of auditor industry specialization in deterring financial fraud is affected by client size.

Publication Date
June, 2004
Citation Information
Joseph V. Carcello and Albert L. Nagy. "Client Size, Auditor Specialization and Fraudulent Financial Reporting" Managerial Auditing Journal Vol. 19 Iss. 5 (2004)
Available at: http://works.bepress.com/joseph_carcello/11/