SUMMARY Prior literature documents differential audit outcomes associated with an auditor’s level of industry specialization. However, archival studies have not prominently examined how specialist auditors achieve such outcomes. Our study develops an industry-specific bankruptcy risk score to serve as an archival proxy for industry-specific information that specialist auditors may utilize. Among distressed clients of firms annually inspected by the PCAOB, we find evidence of a positive association between industry-specific bankruptcy risk and the auditor’s propensity to issue a going concern opinion. We find that this sensitivity to industry-specific bankruptcy risk increases with the auditor’s level of industry specialization. Furthermore, we find that industry specialist auditors achieve lower Type I error rates, although the association between specialization and opinion accuracy is only robust when industry-specific bankruptcy risk is low. Our findings contribute to the bankruptcy prediction, going concern, and industry specialization literature and should be of interest to regulators, auditors, and issuers. Data Availability: The data used in this paper are publicly available from the sources indicated in the text. JEL Classifications: M41; M42.
Berglund et al. (Fri,) studied this question.