DO AUDIT FEES AND AUDIT SPECIALISTS AFFECT THE TIMELINESS OF LOSS RECOGNITION

THE IMPACT OF OFFICE-LEVEL vs. FIRM-LEVEL AUDITORS’ INDUSTRY EXPERTISE ON CONSERVATISM Keith Jones School of Management George Mason University E-mail: kjonesm@gmu.edu * Gopal V. KrishnanDepartment of Accounting Lehigh University E-mail: gok208@lehigh.edu Kevin Melendrez Department of Accounting & IS New Mexico State University E-mail: kdm@nmsu.edu November 2008 *Corresponding author. 1 THE IMPACT OF OFFICE-LEVEL vs. FIRM-LEVEL AUDITORS’ INDUSTRY EXPERTISE ON CONSERVATISM Abstract The objective of this study is to examine whether earnings conservatism, a fundamental property of financial reporting is driven by auditors‘ industry expertise measured at the firm (national)-level or the local office-level. Our findings indicate that it is the office-level industry expertise that drives conservatism. Further, we find that this relation is even stronger for clients who pay high unexpected fees to the auditors, suggesting that fee dependence does not compromise auditor independence for auditors who are city-specific industry leaders. 2 THE IMPACT OF OFFICE-LEVEL vs. FIRM-LEVEL AUDITORS’ INDUSTRY EXPERTISE ON CONSERVATISM I. INTRODUCTION A number of recent studies examine auditing phenomena at city-level markets (Ferguson et al. 2003, Francis et al. 2005a, 2005b, and Krishnan 2005a). Francis et al. (2005b) find that the three-level hierarchy (city-specific, national, and joint city-specific and ...