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Emerald Article: Audit partner specialization: the case of Andersen

followers
Albert Nagy

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Audit partner
Audit partner specialization: specialization
the case of Andersen followers
Albert Nagy
Department of Accountancy, John Carroll University, Cleveland, Ohio, USA 251
Abstract Received 18 February 2011
Purpose – The purpose of this paper is to examine the effects of auditor specialization, at both the Reviewed 7 August 2011
partner and office levels, on audit quality within a developed market (the USA). Accepted 23 August 2011
Design/methodology/approach – This study exploits the environment created when several large
accounting firms purchased select Andersen offices following the firm’s demise in 2002. OLS
regressions were estimated from a sample of companies that assumingly followed their Andersen
partner to the purchased accounting firm to examine the association between abnormal discretionary
accruals and auditor specialization at both the office and partner levels.
Findings – The descriptive statistics and regression results show a significant negative relation
between audit partner specialization and abnormal accruals. Furthermore, the results suggest that
partner level specialization has a greater effect on audit quality than that of office level specialization.
Originality/value – This study contributes to the literature by examining the effects of auditor
specialization at both the office and partner levels on audit quality within a developed market. The
results of this study should be of interest to academics, investors, and regulators and help them in their
assessments of auditor quality.
Keywords United States of America, Auditors, Task specialization, Auditor specialization,
Audit quality, External auditing, Andersen, Abnormal accruals
Paper type Research paper

1. Introduction
The stream of auditor specialization research has methodically refined the auditor
specialization metric over the years. The earlier studies measure auditor expertise at
the national level and provide evidence of a positive association between auditor
specialization and audit quality (Craswell et al., 1995; DeFond et al., 2000; Ferguson and
Stokes, 2002; Balsam et al., 2003; Krishnan, 2003; Carcello and Nagy, 2004). More recent
studies measure auditor expertise at the local office level, arguing that the expertise
cannot be readily captured and distributed by the firm to other offices and clients
(Francis et al., 2005). These studies generally provide evidence that auditor office-level
expertise improves audit quality (Ferguson et al., 2003; Francis et al., 2005; Cenker and
Nagy, 2008). The next logical step in the progression of the specialization metric is to
measure auditor expertise at the individual partner level. Several academic studies,
along with some anecdotal evidence, suggest that partner-level expertise is the most
appropriate measure of auditor specialization. However, data restrictions have limited
the ability of researchers to proxy for such a measure. This study fills this void by
empirically examining the effect of audit partner specialization on audit quality.
The purchases of Andersen offices by several large accounting firms provide a rich
setting to track and examine the effects of individual auditor specialization on audit Managerial Auditing Journal
Vol. 27 No. 3, 2012
quality. Following the demise of Andersen in 2002, certain accounting firms purchased pp. 251-262
select Andersen offices located throughout the USA. The clients of these offices were q Emerald Group Publishing Limited
0268-6902
left with the decision of whether to follow their ex-Andersen partner and select DOI 10.1108/02686901211207483
MAJ the acquiring firm as their new auditor or to select an entirely new audit firm. This
27,3 study focuses on the companies that followed their ex-Andersen partner and selected
the acquiring accounting firm as their new auditor (referred to as followers for the
remainder of the paper). I assume that the ex-Andersen partners coming from an office
specialist industry maintain a level of industry expertise when they begin employment
with their new audit firm. By using a sample of follower companies, I am then able to
252 measure auditor specialization at both the partner and office levels and examine the
effects of each on audit quality.
OLS regressions were estimated from a sample of follower companies to examine the
association between abnormal discretionary accruals and auditor specialization at both
the office and partner levels. The results show a significant negative relation between
audit partner specialization and abnormal accruals. Furthermore, the results suggest
that partner-level specialization has a greater effect on audit quality than
that of office-level specialization. These results should be of interest to academics,
investors, and regulators and help them in their assessments of auditor quality.
The remainder of this paper is organized as follows. First, I discuss prior research
relating to auditor specialization measured at the national, local, and individual levels.
I then develop the hypotheses based on such research. The following sections present
the research design, including the statistical model and variables’ measurements,
sample selection, and results. The last section contains a summary and conclusion of
the findings along with a discussion of the study’s limitations.

2. Prior research
Prior research provides evidence of a positive association between auditor industry
specialization measured at the firm-wide (national) level and audit quality. Specifically,
companies engaging an auditor that is a national industry specialists have lower
abnormal accruals (Balsam et al., 2003; Krishnan, 2003), higher-valued earnings
surprises (Balsam et al., 2003), and lower incidence of fraud (Carcello and Nagy, 2004).
Craswell et al. (1995) find that audit specialists can demand a fee premium for
Australian companies. Ferguson and Stokes (2002), however, select a sample of
Australian companies from a more recent time period and did not find evidence of a fee
premium. DeFond et al. (2000) find evidence of a fee premium for Big-6 industry
specialists using Hong Kong companies. Casterella et al. (2004) find evidence of
fee premiums for industry specialists, but only for smaller companies that have little
bargaining power. All of these studies measure auditor industry specialization at the
firm-wide (national) level.
More recent research focuses on auditor industry specialization measured at the local
(office) level. Ferguson et al. (2003) and Francis et al. (2005) find that both national-level
and office-level industry leadership are associated with audit fee premiums. In addition,
Cenker and Nagy (2008) provide evidence of a negative association between
auditor resignations and office-level industry specialization. These studies provide
evidence that suggests auditor specialization at the local office level improves audit
quality.
A few current studies extend the auditor specialization research by examining
auditor specialization at the partner level. Chin and Chi (2009) estimate a probit
regression from a sample of Taiwanese companies and find that partner experts,
either alone or in conjunction with firm-level experts, are significantly associated
with a lower likelihood of accounting restatements than their non-expert counterparts. Audit partner
Zerni (2011) finds that audit partner specialization is associated with higher audit fees specialization
for a sample of Swedish companies. Karjalainen (2011) provides evidence that audit
partner specialization improves earnings quality for a sample of private companies
operating in Finland. These studies construct their partner specialization proxy by
exploiting reporting regimes where the audit partner signs the audit report.
I complement this research by examining audit partner specialization effects on audit 253
quality using a sample of public companies within a large, developed market (the USA).
In addition, I use abnormal accruals as a proxy for audit quality in the regression models.
The results of this study should be of interest to regulators, investors, and academics
who are interested in assessing auditor quality for companies operating in large,
developed markets.

3. Hypotheses
Auditor specialization develops from the firm’s investment in hiring and training
personnel and the accounting professionals’ experiences in servicing clients that share a
set of unique characteristics. There are various views on how the large audit firms
develop an expertise within certain industries. The national-level perspective assumes
that the accounting firms capture and transfer among their offices industry expertise
through knowledge-sharing practices such as internal benchmarking of the best
practices, the use of standardized industry-tailored audit programs, and extending
the reach of professionals from their primary local-office clientele to other clients
through travel and internal consultative practices (Francis et al., 2005). The office-level
perspective assumes that auditor expertise is permanently tied to individual
professionals and offices, and therefore cannot be readily captured by the firm and
distributed among the offices (Francis et al., 2005). The vast majority of prior research is
based upon these two perspectives and assumes that auditors are homogenous within
the audit firm or within the practice office (Chin and Chi, 2009).
Chin and Chi (2009) provide a convincing argument along with supporting anecdotal
evidence that auditors are not homogenous within the audit firm or office, and that
auditor specialization should be measured at the partner level. The authors point out
that the engagement partner plans and implements the audit and ultimately determines
the type of audit report to be issued to the client (Chin and Chi, 2009). In addition, prior
research suggests that the industry expertise resides in individual personal beliefs,
experiences, and values (i.e. tacit knowledge), and such knowledge is not easily
articulated because it is subconsciously understood and applied (Ambrosini and
Bowman, 2001; Carcello and Nagy, 2004; Polanyi, 1966). Furthermore, the audit firm’s
culture norms may encourage knowledge hoarding as a source of power or job security
(Vera-Munoz et al., 2006). Lastly, a former SEC commissioner suggests that auditor
independence should be assessed at the partner level (Wallman, 1996), and in a recent
release the SEC argues that the engagement partner and the office have more to gain by
acquiescing to the client’s aggressive accounting methods (SEC, 2000). In sum, based on
the prior research and anecdotal evidence, Chin and Chi (2009) conclude that industry
expertise is not standard and homogenous across individual partners, even within the
same audit firm and local office. This leads to the following hypotheses:
H1. Partner-level auditor specialization is positively associated with audit quality.
MAJ H2. Partner-level auditor specialization has a more significant positive effect on
27,3 audit quality than that of office-level specialization.
4. Research design
After preliminary negotiations with several accounting firms to purchase its entire US
audit practice, Andersen decided sometime in the spring of 2002 to sell its practice in
254 parts or by office (Kohlbeck et al., 2008). As a result, several accounting firms (Deloitte,
Ernst & Young, Grant Thornton, and KPMG) purchased select Andersen offices
located throughout the USA. The Andersen audit teams were generally retained by the
purchasing firm. Blouin et al. (2007) obtained anecdotal evidence through discussion
with Big-4 audit partners and personnel that indicates that former Andersen audit
teams were kept largely intact when a client chose to follow Andersen. The authors
point out that even if the prior audit team was not maintained the prior engagement
personnel are likely to be available for consultation (Blouin et al., 2007). I assume that
any personal knowledge and expertise obtained by the Andersen audit team
transferred with them to the new purchasing audit firm. The clients of the Andersen
purchased offices had to decide whether to follow their former Andersen audit team
and select the purchasing firm as their new auditor, or to select an entirely new audit
firm.
The environment resulting from the purchased Andersen offices creates an
opportunity to track and measure auditor specialization at the partner level. By
selecting a sample of companies that followed their Andersen audit partners to the
purchasing firm (followers), this study is able to measure and examine both partner-
and office-level specialization effects on audit quality. The partner-level specialization
is determined in the year preceding the sale of the Andersen office (i.e. the last year
with Andersen), and the office-level specialization is determined in the year following
the sale (i.e. the first year with the purchasing firm). The resulting sample includes
follower observations with auditors designated as specialists at various levels
(i.e. office and individual levels). That is, a follower can have an auditor with joint
specialization (both office and partner level), partner but no office-level specialization,
office but no partner-level specialization, and neither partner- nor office-level
specialization.
A significant amount of research examines the association between accounting
accruals and various audit quality proxies. This body of work suggests that the
amount of discretionary accounting accruals is a reasonable indicator of audit
quality (DeFond and Subramanyam, 1998; Francis et al., 1999; Bartov et al., 2000;
Heninger, 2001). Following prior research that did not have a clear a priori expectation
of management’s incentives, I use the absolute value of discretionary accruals
(versus directional unexpected accruals) as a proxy for audit quality (Warfield et al.,
1995; Francis et al., 1999; Bartov et al., 2000; Klein, 2002; Johnson et al., 2002;
Nagy, 2005)[1].
H1 is tested by estimating the following regression equation for the sample of
companies that followed the Andersen audit team to the new purchasing firm for the
year following the purchase:

ACCRUALS ¼ a þ b1 PARSPEC þ b2 OFFSPEC þ b3 SIZE þ b4 AGE

þ b5 GROWTH þ b6 CFLOW þ b7 LEV þ b8219 INDUSTRY þ e
where: Audit partner
ACCRUALS absolute value of discretionary accruals computed using the specialization
cross-sectional version of the modified Jones (1991) model: total
accruals are computed directly from the statement of cash flows
(Hribar and Collins, 2002)[2].
PARSPEC 1 if Andersen was a local office specialist in the year before the 255
purchase, 0 otherwise.
OFFSPEC 1 if the purchasing audit firm is a local office specialist, 0 otherwise.
SIZE the log of total assets.
AGE the number of years for which total assets is reported in Research
Insight since 1979.
GROWTH change in total assets scaled by prior year total assets.
CFLOW the company’s cash flow from operations scaled by prior year total
assets.
LEV total liabilities scaled by prior year total assets.
INDUSTRY dummy variables based on primary SIC code groupings per Barth et al.
(1998) (12 industry groups).
Andersen was indicted and convicted by the US Department of Justice during the first
half of 2002 (March and June, respectively), and thus the above model was estimated
using data from fiscal years 2001 and 2002. Specifically, the dependent and all the
independent variables except for the PARSPEC variable were determined from 2002
fiscal year data. The PARSPEC variable was determined from fiscal year 2001 data.
In order to test H2, a second regression model was estimated using three separate
auditor specialization variables: an indicator variable ( JOINTSpec) that is coded 1 when
the auditor is identified as an industry specialist at both the partner and office levels
(i.e. PARSPEC and OFFSPEC both equal 1 from the above model); an indicator variable
(PARnoOFF) coded 1 when the auditor is identified as a specialist only at the partner
level (PARSPEC ¼ 1 and OFFSPEC ¼ 0); and an indicator variable (OFFnoPAR) coded
1 when the auditor is identified as a specialist only at the office level (PARSPEC ¼ 0 and
OFFSPEC ¼ 1). This model teases out the effects of partner-level specialization (alone),
office-level specialization (alone), or joint partner-office specialization on audit quality.
A significantly more negative coefficient of the PARnoOFF variable than that of the
OFFnoPAR variable would support H2.

Measuring auditor specialization and control variables

Consistent with prior research, I use audit firm market share as a proxy for auditor
specialization (Palmrose, 1986; Balsam et al., 2003; Carcello and Nagy, 2004; Francis et al.,
2005; Cenker and Nagy, 2008). The auditor market share equals the percentage of audit
fees received within each industry, based on two-digit SIC code. Similar to prior research,
the local office specialist variable is measured within the metropolitan statistical areas
(MSAs) of the auditor’s engagement office (Francis et al., 2005; Cenker and Nagy,
2008)[3].
MAJ The sample consists of ex-Andersen clients that assumingly followed their
27,3 Andersen audit team to the purchasing audit firm (i.e. followers). I assume that the
Andersen partners who were local industry specialists while working for Andersen
retain that industry expertise during the first year while working for the new
purchasing firm. As such, the PARSPEC variable measures whether Andersen was an
industry specialist at the office level in the year preceding the office purchase (fiscal
256 year 2001). The OFFSPEC variable measures office-level industry specialization of the
new purchasing firm (fiscal year 2002). The purchased Andersen clients are brand new
to the local purchasing firm in the test year, thus including them in the local-office
specialization measure may potentially bias toward designating the purchasing firm as
a local industry specialist. In an effort to prevent this potential bias, I exclude the newly
purchased Andersen clients when determining the OFFSPEC metric.
Palmrose (1986) designated audit firms as specialists within an industry if they
serviced a market share 20 percent greater than if the audit firms were to split the
industry evenly among them. Consistent with this research, I determine the PARSPEC
specialization cutoff as 24 percent (1 firm/5 firms * 1.2 ¼ 0.24), and the OFFSPEC
specialization cutoff as 30 percent (1 firm/4 firms * 1.2 ¼ 0.30). The difference in the
cutoffs results from the denominator changing from Big 5 to Big 4 due to Andersen’s
demise in early 2002.
The control variables SIZE, AGE, GROWTH, CFLOW, and LEV are drawn from
prior research (Johnson et al., 2002; Myers et al., 2003; Nagy, 2005). Consistent with this
research, the coefficients b3, b4, and b6 (b5, b7) are predicted to be negative (positive).
A significant and negative PARSPEC variable from the first regression model would
support H1, and a more significant negative coefficient of the PARnoOFF variable
than that of the OFFnoPAR from the second regression model would support H2.

5. Sample
I rely on Kohlbeck et al. (2008) to identify the Andersen offices that were purchased by
other accounting firms[4]. I then use Audit Analytics to identify the ex-Andersen client
companies that hired the purchasing firm as their new auditor (i.e. followers). This
produced a total of 229 companies that were classified as followers. From this initial
sample, the following observations (number in parentheses) were dropped for the stated
reasons: SIC code in the 6,000s (27), observations of local markets that consist of less than
two companies (9), missing control variables data (9), and extreme 1 percent of the
abnormal accruals distribution (4). This resulted in a final sample of 180 observations
that came from 33 Andersen offices purchased by Ernst & Young (13), KPMG (12), and
Deloitte (8).

6. Results
Table I presents descriptive statistics for each of the variables included in the first
regression model. The means and standard deviations are presented by partner
specialists and non-partner specialists (i.e. the test variable PARSPEC). The partner
specialist and non-partner specialist groups consist of 126 and 54 observations,
respectively. Univariate comparisons indicate that, as predicted, the ACCRUALS
variable is significantly lower for the partner specialist group than that of the
non-partner specialist group. In addition, the results show that the partner specialist
group consists of companies that are significantly larger than those included
 Audit partner
Partner specialists Non-partner specialist Difference
Variablea (n ¼ 126) (n ¼ 54) (ParSp – non-ParSp)b specialization
ACCRUALS 0.18 (0.08) 0.28 (0.20) 2 0.10 * *
OFFSPEC 0.25 (0.00) 0.30 (0.00) 2 0.05
SIZE 6.50 (6.33) 5.08 (4.88) 1.42 * * *
AGE 15.07 (13.50) 13.09 (10.00) 1.98 257
GROWTH 0.03 (0.01) 0.05 (0.01) 2 0.02
CFLOW 0.10 (0.10) 0.05 (0.07) 0.05
LEV 0.57 (0.57) 0.51 (0.44) 0.06
Notes: Significant at: *p , 0.10, * *p , 0.05, and * * *p , 0.01, respectively; avariable definitions:
ACCRUALS – absolute value of discretionary accruals; OFFSPEC – 1 if the purchasing audit firm is a
local office specialist, else 0; SIZE – the log of total assets; AGE – the number of years observations
reported in Research Insight since 1979; GROWTH – change in total assets scaled by prior year
total assets; CFLOW – the company’s cash flow from operations scaled by prior year total assets;
LEV – total liabilities scaled by prior year total assets; btests for differences in the means are based on Table I.
t-statistics (z-statistics) for continuous variables (proportions). non-parametric tests for differences in Descriptive statistics
location are based on the Wilcoxon rank-sum test mean (median)

in the non-partner specialist group. All the remaining control variables are not
significantly different between the groups.
Table II shows the results of the first OLS regression estimated for the sample of
Andersen follower companies[5]. The model is highly significant and has an adjusted
R 2 of 33.91 percent. Consistent with H1, the PARSPEC variable is negative and
significant, and suggests that partner specialization reduces abnormal accruals. The
OFFSPEC variable is not statistically significant, and suggests that local-office
specialization of the new purchasing firm does not reduce abnormal accruals for
the follower companies. The control variables SIZE and LEV are significant and in the
predicted directions. The remaining control variables are not significant at any
conventional level. In sum, the regression results suggest that auditor specialization at
the partner level improves audit quality.
In order to test H2, I refine the auditor specialization measures to further separate
office- and partner-level specialization effects. A second regression model was
estimated with three separate industry expertise variables ( JOINTSpec, PARnoOFF,
and OFFnoPAR). This model teases out the effects of partner-level specialization
(alone), office-level specialization (alone), or joint partner-office specialization on audit
quality. Table III shows the results of the OLS regression that includes the three
separate specialization variables estimated for the sample of follower companies. The
model is highly significant and has an adjusted R 2 of 35.23 percent. The partner
specialization alone variable (PARnoOFF) is marginally significant ( p ¼ 0.07), and the
combined partner-office specialization variable ( JOINTSpec) is significant ( p ¼ 0.05)
in the predicted directions. These results suggest that partner-level specialization
reduces abnormal accruals, particularly when the auditor is an industry specialist at
both the partner and office levels.
Interestingly, the office specialization alone variable (OFFnoPAR) is statistically
significant ( p ¼ 0.01) in the opposite (positive) direction than the one predicted. This
result suggests that the followers of non-specialist Andersen partners exhibited higher
levels of abnormal accruals with the new audit firm than of those companies that
MAJ
Variablea,b Prediction Estimated coefficients t-stat.
27,3
Intercept none 0.24 2.77 * * *
PARSPEC – 20.12 3.21 * * *
OFFSPEC – 0.04 1.00
SIZE – 20.02 2.31 * *
258 AGE – 0.01 0.18
GROWTH þ 20.01 0.16
CFLOW – 0.06 0.52
LEV þ 0.14 2.11 * *
Number of observations 180
Adjusted R 2 33.91%
F-ratio 6.10 * * *
Notes: Significant at: *p , 0.10, * *p , 0.05, and * * *p , 0.01, respectively, (based on one-tailed
tests):

ACCRUALS ¼ a þ b1 PARSPEC þ b2 OFFSPEC þ b3 SIZE þ b4 AGE þ b5 GROWTH

þb6 CFLOW þ b7 LEV þ b8219 INDUSTRY þ e
a
variable definitions: ACCRUALS – absolute value of discretionary accruals; PARSPEC – 1 if
Andersen was a local office specialist in year before purchase, else 0; OFFSPEC – 1 if the purchasing
audit firm is a local office specialist, else 0; SIZE – the log of total assets; AGE – the number of years
observations reported in Research Insight since 1979; GROWTH – change in total assets scaled by
prior year total assets; CFLOW – the company’s cash flow from operations scaled by prior year total
Table II. assets; LEV¼ total liabilities scaled by prior year total assets; bindustry dummy variables have been
Regression model suppressed for expositional convenience

followed a specialist Andersen partner. This is the case even when the new audit firm
is a local office specialist. These results suggest that partner-level specialization has a
significantly greater effect on audit quality than that of local office-level specialization,
and support H2[6].

7. Summary, implications, and limitations

Prior research in the area of auditor specialization has generally found that auditor
specialization improves audit quality. The vast majority of this research measures
auditor specialization at the national and/or office level of the audit firm. Several of
these studies, along with anecdotal evidence, suggest that a more appropriate measure
of auditor specialization should be one made at the partner level. However, such a
measure is difficult to obtain for the US audit market because US audit partners are not
required to sign the audit reports. This study fills this void by measuring both partner-
and office-level specialization effects on audit quality for a sample of companies that
followed their Andersen partner to a new audit firm.
I provide evidence that audit partner specialization improves audit quality.
Furthermore, the results suggest that audit partner specialization has a greater impact
on audit quality than that of office-level specialization. These results should aid
regulators, practitioners, and academics in assessing the quality of the external audit
function in developed markets.
This study is subject to several limitations. First, the auditor specialization measures
are noisy. The partner specialization measure assumes that the ex-Andersen partner
 Audit partner
Variablea,b Prediction Estimated coefficients t-stat.
specialization
Intercept none 0.20 2.35 * *
PARnoOFF – 2 0.07 1.46 *
OFFnoPAR 2 0.14 2.27
JOINTSpec 2 2 0.09 1.65 * *
SIZE – 2 0.02 2.20 * * 259
AGE – 0.01 0.15
GROWTH þ 2 0.01 0.11
CFLOW 2 0.04 0.33
LEV þ 0.11 1.74 * *
Number of observations 180
Adjusted R 2 35.23%
F-ratio 6.12 * * *
Notes: Significant at: *p , 0.10, * *p , 0.05, and * * *p , 0.01, respectively, (based on one-tailed
tests):

ACCRUALS ¼ a þ b1 PARnoOFF þ b2 OFFnoPAR þ b3 JOINTSpec þ b4 SIZE þ b5 AGE

þb6 GROWTH þ b7 CFLOW þ b8 LEV þ b9220 INDUSTRY þ e
a
variable definitions: ACCRUALS – absolute value of discretionary accruals; PARnoOFF – 1 if
Andersen was a local office specialist in the year before the purchase and the purchasing audit firm is
not a local office specialist, else 0; OFFnoPAR – 1 if the purchasing audit firm is a local office specialist
and Andersen was not a local office specialist in the year before the purchase, else 0; JOINTSpec – 1 if
Andersen was a local office specialist in the year before the purchase and the purchasing audit firm is
a local office specialist, else 0; SIZE – the log of total assets; AGE – the number of years observations
reported in Research Insight since 1979; GROWTH – change in total assets scaled by prior year
total assets; CFLOW – the company’s cash flow from operations scaled by prior year total assets;
LEV – total liabilities scaled by prior year total assets; bindustry dummy variables have been Table III.
suppressed for expositional convenience Regression model

stayed with the purchasing office and remained employed with the new audit firm, and
that the Andersen partners coming from local specialist industries are individual
specialists. If either of these assumptions is violated, the partner specialization proxy
becomes less reliable. Second, this study examines auditor specialization for a rather
unique sample. I select a sample of Andersen follower companies in order to measure
auditor specialization at the partner level. As such, the partner-specialization effects
were measured from one audit firm (Andersen) during a unique time period (the demise
of Andersen). If the firm and time period characteristics differ significantly from the
general population, then the contribution of the study is lessened.
In this paper, I develop and support hypotheses that predict a positive relation
between audit partner specialization and audit quality. Hopefully, this study helps
move the audit specialization research forward by providing some evidence on the
audit specialization and audit quality relation at both the partner and office levels.

Notes
1. The Table III regression was re-estimated using signed accruals as the dependent variable.
The unreported results find that the PARnoOFF and JOINTSpec variables significantly
increase negative accruals, and that the OFFnoPAR variable significantly reduces
MAJ (increases) negative (positive) accruals. In addition, the prior year means of the signed
abnormal accruals are not significantly different among the three groups (PARnoOFF,
27,3 JOINTSpec, OFFnoPAR). In sum, the concluded partner-specialization effect on audit
quality holds when using signed accruals as the dependent variable, and appears not to be
driven by prior year accruals.
2. Following prior research, I calculated abnormal accruals by estimating the following model
260 in the test year by two-digit SIC Code:

TA ¼ a1 þ a2 ðDREV 2 DARÞ þ a3 ðPPEÞ

where TA – earnings before extraordinary items minus cash flows from continuing
operations; REV – total sales revenue; AR – accounts receivable PPE – gross property,
plant, and equipment. All variables are scaled by prior year total assets. The residual of the
above regression is the abnormal accrual. All SIC code groupings with less than ten
observations were deleted from analyses.
3. The Office of Management and Budget (2000) defines MSAs for purposes of collecting,
tabulating, and publishing federal data. The general concept of an MSA is that of an area
containing a recognized population nucleus and adjacent communities that have a high degree
of integration with that nucleus. The current listing of MSAs and components (cities and
counties) may be found at: www.census.gov/population/www/metroareas/metrodef.html.
The location (i.e. city) of the auditor’s engagement office was obtained from Audit Analytics.
4. Kohlbeck et al. (2008) examine press releases and press articles to determine Andersen office
classifications. The authors validate their classification by comparing it to the Public
Accounting Report, a trade newsletter. They determine that the Big-4 firms purchased
39 offices and three local industry practice units from large offices of the 65 Andersen offices
that served public clients in 2001. Specifically, Ernst & Young purchased 16 Andersen offices
and three local industry practice units, KPMG and Deloitte purchased 15 and eight Andersen
offices, respectively, and PwC purchased no Andersen offices (Kohlbeck et al., 2008).
5. The coefficients for each industry variable are not included in the tables in the interest of
brevity.
6. The PARnoOFF and OFFnoPAR coefficients are significantly different from each other
( p , 0.01).

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Corresponding author
Albert Nagy can be contacted at: alnagy@jcu.edu

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