An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Wei Yu
Georgia Institute of Technology

Abstract: Prior research suggests that industry specialist auditors constrain accruals-based earnings management. But such actions may cause client companies to seek alternative means to manage earnings. Specifically, companies that hire industry specialist auditors may alter operating decisions to meet earnings targets, referred to as real activities manipulation. The current study investigates whether clients of industry specialist auditors are more likely to engage in real activities manipulation and, in turn, whether such behavior is detrimental to firm value over time. My findings indicate that clients of industry specialist auditors are more likely to manipulate real activities to meet earnings target than clients of a non-specialist auditor. Furthermore, operating performance following real activities manipulation suffers in the long run. Thus, hiring an industry specialist auditor can have an unintended effect, which is detrimental to firm value in the long run.

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