Auditor's Supply Chain Expertise and Discretionary Accruals

This paper examines the effect of auditors' supply chain expertise on discretionary accruals of major suppliers or customers in supply chain relationships. With sufficient industry knowledge and experience, a supply chain specialist auditor can provide quality-differentiated audit services by integrating financial information of supply chain partners. Therefore, this paper infers that supply chain specialist auditors enhance audit quality by decreasing the usage of discretionary accruals for their understanding of real purchase and sales transactions. This paper further categorizes supply chain specialist auditors into downstream and upstream specialist auditors considering the differences in their acquired financial information. Results indicate that supply chain specialist auditors decrease the magnitude of discretionary accruals. Moreover, positive and negative discretionary accruals decrease by employing downstream and upstream specialist auditors, respectively. Furthermore, this paper provides evidence that the cross-period discretionary accrual changes are made more by downstream specialist auditors than upstream when supply chain partners hire a supply chain specialist auditor for the first time.