The effect of auditors' geographic distance and industry specialization on the reporting of goodwill impairment

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Abstract

Using a sample of 1,385 firm year observations collected for UK nonfinancial listed firms on the LSE FTSE ALL SHARES index, this paper investigates the effect of geographic proximity between auditors and their clients, and auditor industry specialization on the reporting of goodwill impairment over the period from 2006 – 2014. Results show a strongly significant positive relationship between geographic distance, measure by log of miles, and both the likelihood and magnitude of unexpected goodwill impairment. This indicates that the greater the distance between audit firm and the client headquarter, the greater information asymmetry and the less likely that auditors might control management from manipulating the impairment test and reporting more/less goodwill impairment than it should be. Interestingly, when the auditor is specialized, his expertise and knowledge helps to reduce the information asymmetry problems and become better able to challenge the management on the estimates and assumptions they have used, and thus constrain them from using goodwill impairment as a tool for managing their earnings. However, auditors’ specialization is moderating this relationship only when auditors are classified as being specialized on the regional level, demonstrating that knowledge and expertise are shared only between audit partners and offices located in the same region, and not expanded to others located outside that region.
Original languageEnglish
Number of pages31
Publication statusPublished - 10 Apr 2017
EventBritish Accounting & Finance Association (BAFA) Annual Conference 2017 - Heriot Watt University, Edinburgh, United Kingdom
Duration: 10 Apr 201712 Apr 2017
http://bafa.ac.uk/events/upcoming-events/annual-conference-2017.html

Conference

ConferenceBritish Accounting & Finance Association (BAFA) Annual Conference 2017
CountryUnited Kingdom
CityEdinburgh
Period10/04/1712/04/17
Internet address

Keywords

  • goodwill impairment
  • auditor specialization
  • geographic distance
  • board diversity

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  • Activities

    • 1 Participation in conference

    British Accounting & Finance Association (BAFA) Annual Conference 2017

    Julia Smith (Participant)

    10 Apr 201712 Apr 2017

    Activity: Participating in or organising an event typesParticipation in conference

    Cite this

    Elmahgoub, M., & Smith, J. (2017). The effect of auditors' geographic distance and industry specialization on the reporting of goodwill impairment. Paper presented at British Accounting & Finance Association (BAFA) Annual Conference 2017, Edinburgh, United Kingdom.