Asian Social Science; Vol. 12, No.

8; 2016
ISSN 1911-2017 E-ISSN 1911-2025
Published by Canadian Center of Science and Education

The Effect of Auditor’s Industry Specialization on the Quality of

Financial Reporting of the Listed Companies in Tehran Stock Exchange
Rodabeh Havasi1 & Roya Darabi2
1
MA in Accounting, South Tehran Branch, Islamic Azad University, Tehran, Iran
2
Department of Accounting, South Tehran Branch, Islamic Azad University, Tehran, Iran
Correspondence: Roya Darabi, Department of Accounting, South Tehran Branch, Islamic Azad University,
Tehran, Iran. E-mail: royadarabi110@yahoo.com

Received: February 28, 2016 Accepted: May 4, 2016 Online Published: July 7, 2016
doi:10.5539/ass.v12n8p92 URL: http://dx.doi.org/10.5539/ass.v12n8p92

Abstract
This study examines the effect of auditor’s industry specialization on quality of financial reporting of the listed
companies in Tehran Stock Exchange during the period of 7 years from 2008 to 2014. It is expected that industry
specialist auditors will show more competence and auditing quality in discovering opportunistic behavior in
executives and most probably they will report financial statements to maintain their reputation; in other words, it
is expected that auditors specialized in industry will have an effective role in corporate governance and
improving the quality of financial reporting. In this research, the accurate of predicting future cash flows
operations through components of the operation profit was served as a measure for the quality of financial
reporting and patters of the market share based on the total audited properties of the company and total auditor
income was used as auditor expertise characteristics in that audited unit's industry were used. A total number of
119 companies were selected as samples and using logit regression model, the results were analyzed. The
findings suggest that auditor's expertise in the industry, has a direct impact on the quality of corporate financial
reporting. In this regard, testing the research's hypotheses showed that the auditor expertise in the industry (on
the basis of market share pattern based on auditor's total revenue) has no significant effect on the quality of
financial reporting. However, if the auditor expertise in the industry (on the basis of market share pattern based
on the sum of the audited assets) was to be measured, it will leave a significant effect on the quality of financial
reports. Therefore, it is concluded that the factor of the auditor's expertise in the industry is sensitive in relation
with the type of indices used to assess it.
Keywords: Auditor expertise in the industry, quality of financial reporting
1. Introduction
In all history, man has been in need for information to try to understand phenomena and reduce uncertainty about
the unknown in a way that the beginning of the human history coincides with his ability to accumulate
information and exchange it. In a financial unit, the executive's main task is making decisions and the basis of
decision making is being informed, because without reliable information, logical decisions cannot be made
(Behmanesh, 2006).
To get on time, correct and reliable information related to financial activities of economic agencies, one of the
primary conditions is for people to invest (Zadmhr, 1999; Talanh, 2001). Therefore, information that is provided
in financial reporting process, must be in a way to help investors by evaluating executives' efficiency in terms of
proper saving and use of resources. Representatives of shareholders –meaning the executives- are regarded as the
protectors of the shareholders and investors' national wealth and resources in financial institutions. Therefore, it
is necessary for the executives to provide comprehensive reports on the results of their operations and actions
which include the financial state and the result of the executive's activities in a correct and clear way for the
shareholders at least at the end of each fiscal year (Mojtahedzade & Chytsazan, 2005).
Leading stationary savings towards production units and establishing facilities for public participation in industry
development and sharing factories' profits with the public are regarded as some of the goals of the capital market.
To reach these goals, the capital market must gain the trust of the investors. This trust can only be achieved in the
shade a clear capital market and the clarity of the capital market relies on the financial reporting of the listed

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companies with quality in that market. Since financial reporting with quality causes the reduction of inside
information and the improvement of market efficiency, it bears great importance.
The quality of financial reporting can be defined as the accuracy of reflecting information related to operations
and flow of cash in that financial unit. Based on the theoretical concepts of financial reporting, the primary
objective of financial statements is presenting summarized and categorized information regarding the financial
state, efficiency and flexibility of that financial unit to help users of financial statements in taking economic
decisions. The quality of financial information is analyzed from different perspectives. Therefore, the main factor
for the quality of financial information from the perspective of the devisers of the accounting standards are the
two features of relevance and reliability and these two aspects make the information useful for the decision
makers (Qamary, 2011).
The informational asymmetry between the company and the shareholders causes the shareholders to demand
more information that is valid. Independent auditing if effective on the measure of truth and accuracy of financial
statements and financial information. Titman and Truman (1988) introduce auditing as a factor increasing the
amount of accuracy and truth in information that is presented to the shareholders after auditing.
In fact, according to the representation theory, executives have more information in comparison with the
shareholders may make decisions that are not in the interests of the shareholders. The auditing process is
considered as one of the important approaches in decreasing representation conflicts and opportunistic behaviors
of the executives in manipulating the items in the financial statements. Recent studies show that the superior
system of financial reporting reduces capital expenses and improves efficiency (Bushman and Smith, 2001).
Further, theoretical rationalizing show that the high quality of financial reports causes the reduction of problems
in financial units and also the reduction of expanses of identifying and selecting capital projects. Therefore, the
issue that will be addressed in this study is whether the auditor's industry specialization is also effective on the
quality of financial reports from the listed companies in Tehran Stock Exchange. In other words, has the
existence of the industry specialist auditors provided the grounds for the improvement of the quality of financial
reports from listed companies in Tehran Stock Exchange?
2. Review of Literature
2.1 Auditor's Specialty
Special knowledge of one specific industry is used by an auditing institution in order to help reaching a better
understanding of what the masters of that industry do and also the risks that they face in auditing (Kend, 2008).
Therefore, the expertise of the auditor in the industry is an important distinguishing factor among auditing
institutions. The expertise of the auditor is obtained using the following equation:
Specialty auditor: Auditor – Spec
Dunn and Mayhew (2004) believe that auditors specialized in industry have more knowledge and experience in
comparison with non-specialist auditors. Recent studies by Dunn and Mayhew (2004) showed that the expertise
of the auditors has a direct relation with the quality of the accounting information and the expertise of the
auditors plays an important role the supervision over the process of financial reporting. Researchers like
Craswell et al. (1995), D. Fund et al. (2000), Balsam et al. (2003), Krishnan (2003), Francis et al. (2005) and
Richlet and Wang (2010) have shown that the quality of auditing and the amount of profit in companies that
enjoy industry specialist auditors is more.
2.2 Quality of Financial Reporting
Quality of financial reporting can be defined as the amount of accuracy in the financial reporting in reflecting
information about operations and flows of cash in financial units. There are two general approaches in assessing
the quality of financial reporting: the approach of the users' needs and the approach of supporting investors and
shareholders. In the approach of the users' needs, the quality of financial reporting is defined and determined as
the usefulness of the financial information (relevance and reliability). In the approach of supporting investors
and shareholders, the quality of financial reporting is defined in general based on the full and fair disclosure for
shareholders (Qamari, 2011).
2.3 Auditor Industry Specialization and Other Proxies of Financial Reporting Quality
One of the proxies of the quality of financial reporting used by professional analysts is the quality of the
voluntary disclosure quality. Theoretical researches suggest more disclosure increases market liquidity and
decreases transaction costs and consequently, lead to decreases in capital expenses. Experimental evidences are
paradoxical. Dunn and Mayhew (2004) found a direct relation between the auditing institution's specialty in the

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industry and the company's disclosure quality but did not consider the role of the value of industry specialized
auditors. Further, the relation between the industry specialization of the auditor and the improvement in the
quality of disclosure must be tested by the market.
But Peine (2008) did no systematic analyses for the behavior of the voluntary commitment items for companies
that have not been able to achieve the analysts' predictions. This is a matter of high importance, because equality
or inequality of the real benefit with the analysts' prediction do not indicate the positive effect of the industry
specialist auditors in itself. Furthermore, researchers are still unable to answer the question that why should the
executives use industry specialized auditors when several indicators show that the market shows a negative
response to a profit which is lower than the analysts' predictions? Similar to other proxies, this proxy has also
been criticized as a criterion for profit management by researches like Dechow et al. (2003), Durtschi and Easton
(2005) and Durtschi and Easton (2009) in terms of its credibility. But, Jacob and Jorgensen (2007) argue that
these challenges are misinterpreted.
2.4 Research Background
Krishnan (2003) analyzed the relationship between the auditor's industry specialization and the net value of the
client's voluntary commitment items. He reached the conclusion that the clients of the non-specialized auditors,
with an average of 1.2 percent higher of their total properties, report their net voluntary commitment items
higher than the net voluntary commitment items of the auditors' clients.
Jenkins et al. (2006), studied the impact of the auditor's specialty in the industry on the reduction of the profit
quality in the late 1990s. The question was if the industry specialized auditors had any roles in reducing the
profit quality in the late 1990s or not. The findings of their research indicated a meaningful increase in the
coefficients of the profitability equation, which these findings are viewed as the reduction of the profitability
quality in this period. But, the increase in the voluntary commitment items and reduction of coefficients of the
profitability equation in companies where industry specialized auditors were utilized was the least among all
companies.
Gool et al. (2009) studied the impact of the auditor's specialty in the industry on the relation between the period
of the auditor's service and the profitability quality. The results of this study showed that the relation between the
short-term period of the auditor's service and lower profitability quality for clients whose work was audited by
industry specialized auditor is lower than others.
Shoaeir (2010) analyzed the impact of the auditor's specialty in the industry on the auditing quality. The results
of her research indicated that with the use of the measure of the auditor's share in a certain industry, the level of
voluntary commitment items in the industry specialists is lower.
In a study entitled "Industry specialty of auditing companies and the profitability quality" Karjalaynn (2011)
found out that the specialty in the industry in auditing in Finland has a direct relation with the reported
profitability quality. He confirmed that the level of voluntary commitment items in companies that are audited by
specialized companies is lower in comparison with other private companies. Therefore, the results indicate that
the industry specialization of the auditing company is a source of differentiation in the auditing quality.
In his study, entitled "Auditor's industry specialization and the coefficient in the profitability equation",
Bhattacharya (2011) studied the relation between the industry specialized auditors and the profitability equation
coefficient of New Zealand companies. The results of this study showed that the auditor's industry specialty did
not have any meaningful impact on the profitability equation coefficient of New Zealand companies.
Sun and Liu (2013) studied the interactional impact of the auditor's industry specialization and the independence
of the board of executives on the profit management in American production companies. Results showed that the
independence of the board of executives on its own cannot reduce the amount of manipulation in the voluntary
commitment items. Further, non-serving members of the board of executives in companies who utilized industry
specialized auditors can limit the amount of the voluntary commitment items.
Debra and Jeter et al. (2014) studied the impact of the industry specialized auditor on the expenses efficiency in
homogenous industries. Results of this research show that the industry specialized auditors can take the costs to
the lowest possible levels in industries with homogenous operation and complicated accounting methods and
they can also increase the auditing quality in these industries.
Etemadi et al. (2009) in a study entitled "Studying the relationship between the auditor's industry specialization
and profitability quality in listed companies in Tehran stock Exchange" showed that companies whose auditor
was specialized in the industry had lower level of net voluntary commitment items and higher profitability
equation coefficients in comparison with companies whose auditors were not specialized in the industry.

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Hasas Yegganeh et al. (22012) analyzedd the impact oof the auditor'ss industry speccialization on financial repo orting
and the caapital market's reaction. In tthis research, tthe coefficientt of reaction too profits in coompanies that were
audited byy industry sppecialized audditors was com mpared to coompanies whoo were not auudited by ind dustry
specializedd auditors. Reesults of this research show wed that theree is not a siggnificant differrence between n the
informatioonal content off the commitmment and cash pparticles of thee profit in com mpanies with inndustry speciaalized
auditors inn comparison with
w other com mpanies.
Nazemi A Ardakani (20122) studied the impacts of thee auditor's induustry specializzation on the ddifferent aspeccts of
profit mannagement (in other
o words, mmanaging com mmitment item ms and real proofit managemeent) and the future
f
operationaal efficiency ofo the listed coompanies in T Tehran Stock Exchange. In this study, thhe approach of the
auditor's m
market share was
w used to meeasure the audiitor's specialtyy yin the indusstry. Results off this study sho
owed
that in Irann, clients who have industry specialized auuditors, face lim
mits in managging voluntary commitment itemsi
and conseqquently, switchh to real profit management.
Estehmam mi (2013) anallyzed the imppact of the auuditor's industrry specializatiion and auditiing quality on n the
profitabilitty equation coefficient of thee listed compaanies in Tehrann Stock Exchannge. Results shhowed that witth the
increase inn the auditor's specialty, the companies' prrofitability reacction coefficieent increased aand the profitab
bility
equation ccoefficient of the companies who had inndustry speciallized auditors was more thaan the profitab bility
equation ccoefficient of thhe companies w who do not haave industry sppecialized audiitors.
Barzideh aand Madanchihha (2014) studdied the impactt of specializattion of the audditing companyy in the industrry on
the delay iin auditing repport. To test thhe research's hyypothesis, the financial and non-financial information of 311
mpanies in Tehrran Stock Excchange during the years 20005 to 2013 wass analyzed usiing the multi-ffactor
listed com
regressionn model. Resullts of the hypoothesis test in tthe first state sshowed that thhe auditor's inddustry specialty
y has
no meaninngful impact onn the delay in auditing reporrt, but the resuults of testing tthe hypothesis in the second state
showed that the auditor'ss specialty in tthe industry haas significant aand inverted immpact on the deelay in the audditing
report.
2.5 Researrch Hypothesiss
H1: Audittor's industry specialization hhas a significannt impact on thhe quality of fiinancial reportting.
H1-1: Audditor's industryy specializationn (based on thhe model of mmarket share baased on total asssets of the audited
company) has a significaant impact on tthe quality of ffinancial reporrting.
H1-2: Audditor's industryy specializationn (based on thhe model of thhe market sharee based on tottal audit fees) has
h a
significantt impact on thee quality of finnancial reportinng.
2.6 Concepptual Model off the Study
Given thatt in this studyy, the effect off auditor's inddustry specialization on the quality of finnancial reportin
ng is
examined, based on thhe research's conceptual m model in the ffollowing wayy, the impactt of the resea arch's
independent variable on its dependent variable is evaaluated.

Financial Repoorting Quality

Auditor Specialty

Pattern baseed on total the au

udit Pattern based, au
udited company
fees assets Total

F
Figure 1. Reseearch conceptuual model

3. Researcch Methodoloogy
In terms oof its goal, thiss research shouuld be regardeed as a practiccal study. Pracctical studies aare those that apply
a
theories, laaws, principless and technics that are deviseed in basic stuudies to solve eexecution probblems. This stu
udy is
of a homoogenous naturee and uses the secondary daata from the lissted companiees' financial staatements in Te ehran

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Stock Exchange to analyze the homogeneity relation. Homogeneity studies include researches in which it is tried
to discover and determine the relation between different variables using the homogeneity coefficient. In
homogeneity researches, the main goal is to determine the type, size and amount of relation between two or more
variables. Furthermore, this study is of the comparative- syllogistic nature in terms of its logic. In this type of
logic, the movement is from the known to the unknown. In this method, the experiment is analyzed
syllogistically and leads to the hypotheses. Then, with a comparative method, the concepts of the hypotheses are
tested so that their readability can be evaluated.
3.1 Statistical Population and Sampling Method
Statistical method of this research includes the listed companies in Tehran Stock Exchange. The sample is the
sum of sizes from the statistical group that are practically collected during the research and the process of a
research can be distinguished as an effort to understand the behavior of the statistical group based on the gained
information from the sample. Because collecting information for all the statistical group necessitates great
amounts of expense and time. Furthermore, in some cases the information collection from all the members of the
statistical group is illogical. Therefore, it is an obligation to extract a sample and on the other hand, it is a
common knowledge that sampling causes reduction of certainty and trust of the results. To determine the studied
sample, companies from the above mentioned statistical group has been selected that:
1. Their financial information from the study's time period, meaning the years from 2008 to 2014 is available.
2. Their fiscal year ends in March.
3. Companies who were listed in the Stock Exchange until the end of March 2007 and their names in the studied
period were not eliminated from the companies that were listed in Tehran Stock Exchange.
4. Companies that have not changed their fiscal term in the studied period.
5. Companies that are not among the financial and investing institution.
Accordingly, after applying the above mentioned restrictions, 119 companies had the above mentioned
conditions during the years 2007 to 2013 and with regard to this, sampling was not done and all the companies
were selected to be analyzed.
3.2 Data Collection Method
In this study, the library method was used for gathering information in the theoretical department and for
research history. The needed information collection method of the research in the stage of devising the library
research methodology, searching the internet, studying papers, journals, assertions and other scientific sources is
valid and the other part of the data is extracted from the soft-wares available in Tehran Stock Exchange which
include information regarding the financial statements of the sample accompanies. The collected data was
adjusted and classified using Excel Software. Then, the final analysis is done using Eviews and SPSS soft-wares.
First the Jarque Bera test is done to make sure of the normal state of the used data, then, using the multi standard
regression, the hypotheses are tested. Furthermore, in this research, with regard to the type of the data and
available analysis methods, the combinational data method is used. Combinational data is from data related to
different companies in different years and is considered in the form of company-year observations. These type of
data have advantages such as presenting more information, inequality in the limited variance, the lesser level of
equality between variances, more freedom ranges and more efficiency.
Research Model
According to the presented hypotheses regarding the impact of the auditor's specialty on the quality of financial
reporting, the regression model for testing the hypotheses in this study is as follows:
QFRi,t = β0 + β1 Auditor ¬ Spec i,t + β2 Sizei,t + β3 Debti,t + β4 Profi,t + ɛi,t
In the above model:
QRF: Quality Financial Reporting
Auditor-Spec: Auditor Specialty
Size: The size
Debt: Ratio Debt
Prof: Profitability margin
Ɛ: left over

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3.3 Researrch Variables

The independent variablle of this studyy is the auditoor's specialty. IIn the current research, stanndards based on the
market shaare of the totaal properties oof the audited companies and the total feees for auditorss for measuring the
specialty oof the industry specialized auuditing are utilized.
Use of Markett Share Based on Company S
3.3.1 The U Size (Total Asssets)
The markeet share with reegard to the total assets of thhe company is calculated in tthe following m
method:
T
Total assets off all clients an
ny special aud
dit firm in a paarticular
iindustry
Totaal assets of all employers in the industry
Only instittutions are reggarded as indusstry specializeed in this reseaarch whose maarket share (meeaning the resu
ult of
the above equation) is more
m than [1/2 * (companies iin the industryy / 1)] is (Palm Rose, 1986).
3.3.2 Usinng the Market Share
S of the Auuditing Fee
To measurre and evaluate the specialtyy of the auditoor in the indusstry, using the auditor's fee ((having the big
ggest
share in thhe market (majjority) for the iindustry speciaalized auditor)) from the moddel by Habib aand Bouyan (2011),
the following equation iss applied:

In the moddel above, AF (auditing feess) and the num merator represeent the sum off the clients' paaid fees (Jik) to the
auditing coompany (i) in a certain indusstry (k) and thee denominatorr represents thee sum of the tootal fees paid by b all
the clients (Jik) in a certaain industry (kk) to all the serrving auditing companies (Ikk) in that indusstry.
In this studdy, the dependdent variable is the quality oof financial repporting and thee basis for meeasuring the qu
uality
of financiaal reporting is the
t waste obtaained from the estimation of the following regression moodel:
CFOi,t+1= α0 + β1CFOi,t +β
+ 2ΔARi,t + β3Δ
ΔINVi,t + β4ΔA
APi,t+ β5DEPi,t+ β6OTHERi,t+
+εi,t
where in:
CFOi,t : Caash flow from operations for the company i per year t.
ΔARi,t: Chhange in accouunts receivable company i per year t.
Changes in inveentories company i per year t.
ΔINVi,t : C
ΔAPi,t : Chhange in accouunts payable annd deferred debbt company i pper year t.
DEPi,t : Thhe cost of depreeciation of tanngible fixed asssets and intanggible company i per year t.
OTHERi,t : Net other acccruals which iss calculated as follows:
OPi,t - (CF
FOi,t + ΔARi,t + ΔINVi,t - ΔAP
Pi,t - DEPi,t
OPi,t : operrating Profit
εi,t : deal errror which is assumed
a to havve zero mean aand variance of the is fixed.
Control vaariables in this study are sizee, leverage andd profit marginns whose impaacts are controllled to have a more
accurate aanalysis of thee impact of thhe auditor's sppecialty on finnancial reportting quality soo that the rese earch
hypotheses are better tessted.
It is expeccted that a signnificant relatioonship should exist betweenn the companyy size and the financial repo
orting
quality. Thhe operational definition of thhis variance iss as follows:
SIZEi,t = L
Ln(Ni,t × Pi,t )
where in:
p: companny Stock price
N: The num
mber of sharess in the compaany current
It is also eexpected that a significant rrelation shouldd exist betweeen profitabilityy margins and financial repo
orting
quality. Thhe operational definition of thhis variance iss as follows:

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LEV i, t = TL i, t / TA i, t
where in:
TA: Total assets
TL: Total liabilities
Therefore, it is expected that a significant relation should exist between profitability margins and financial
reporting quality. The operational definition of this variance is as follows:
PROF = (SALE −COGS) /SALE
where in:
COGS: Cost of sales
Sales revenues: SALE
3.4 Descriptive Statistics of Variables
Descriptive statistics merely describes the statistical group and its goal is to calculate the society's parameters. In
this paper, the statistical indicators of the group for the studied variances are generally calculated. These
indicators include central indicators, dispersion indicators and indicators of the distribution form.

Table 1. Descriptive statistics of the research variables

Standard
Variable Average Middle Maximum At least Skewness Elongation
deviation
0.545 1.000 1.000 0.000 0.498 -0.181 1.032
Specialty According Total assets 0.566 1.000 1.000 0.000 0.495 -0.268 1.072
auditor Based on the audit fees 0.430 0.000 1.000 0.000 0.495 0.281 1.079
company size 5.888 5.818 8.032 4.318 0.569 0.746 4.134
Ratio Debt 0.664 0.673 1.941 0.096 0.187 0.589 7.198
Profit margin 0.232 0.205 0.830 -0.376 0.167 0.645 5.031

In studying most of the descriptive indicators of the variances it is observed that the average of most variances is
bigger (smaller) than the middle amount. The bigger or smaller average than the middle amount indicates the
existence of big points in the data, because the average is affected by these amounts. In these cases, the data
distribution is skewed to the right or skewed to the left and the skewness range is not located in the range of +2
to -2 which shows that the variance distribution has a great difference with the normal distribution in terms of
symmetry. In other words, the remote data from the average, middle and the view is located either on the right or
the left of the measure.
3.5 Testing the Normality Distribution of Variables
According to the values of the Jarque Bera indicator and its possibility (the possibility of the indicator for less
than an error level of 5 percent), the variances do not have a normal distribution. Although by using a process,
the data can be normalized, on the other hand, normalizing data is a type of data manipulation that is not excused
in the scientific method process and on the other hand, with regard to the high number of the observations in
accordance with the central limit theory, the lack of normality in the research variables does not pose any
interventions in the continuance of the analyses.

Table 2. Test of normality distribution of variables

Variables Statistics Jarek-to Sig.
Quality financial reporting 162.7104 0.000
Auditor's expertise based on Total assets 162.8789 0.000
Auditor Specialty based on audit fees 162.9218 0.000
Company size 143.0350 0.000
Ratio debt 771.8416 0.000
Margin of profit 105.4677 0.000

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3.6 Correlational Analysis

To analyze the correlation between the research's coefficients the Pearson correlation coefficients are used. One
of the reasons for studying this is to control the correlation phenomenon between the descriptive variances of the
model. From a theoretical perspective, the existence of a strong correlation between descriptive coefficients of
the model leads to the formation of the correlation problem. With regard to the pair correlation coefficients and
the related probability except for a few items (that are highlighted), a meaningful correlation (indicator
probability with an error level less than 5 percent) is observed between pair coefficients, which in some cases the
correlation is positive and in some it is negative. But its intensity is not to the extent that would lead to the
appearance of correlation. This means that there is a possibility for the research's model to be applied with the
simultaneous existence of all the descriptive variances.

Table 3. Correlation coefficients matrix between research explanatory variables

Quality
Auditor's Expertise Auditor Specialty Company Ratio Margin of
Variables financial
Based on Total Assets Based on Audit Fees Size debt profit
reporting
Quality financial 0.094** 0.186 0.254** .344 -.198*
1
reporting 0.000 0.000 0.000 0.085 0.042
auditor's expertise 0.094** 0.235** 0.161** -0.014 0.191**
1
based on Total assets 0.000 0.000 0.000 0.744 0.000
auditor Specialty 0.186 0.235** 0.249** 0.228 **
0.184**
1
based on audit fees 0.121 0.000 0.000 0.000 0.000
0.254** 0.161** 0.249** 0.299 **
0.110**
company size 1
0.000 0.000 0.000 0.000 0.000
0.344 -0.014 0.228** 0.299** 0.141**
Ratio debt 1
0.085 0.744 0.000 0.000 0.000
-0.198* 0.191** 0.184** 0.110** 0.141 **
Margin of profit 1
0.042 0.000 0.000 0.000 0.000
* Significant in probability level of 95 %; ** Significant in probability level of 99 %

4. Testing the Model of the Quality of Financial Reporting

To achieve a model of financial reporting quality in this research, the multifold linear regression with the method
of Empirical Generalized Least Squares (EGLS) is used. In this method, the inequality of the variances' waste
through minimizing the weight sum of the squares of the residuals that indicate the average weight is minimized.
First the regression pattern of the models is achieved using the Limer and Hausman F tests, then, to test the
meaningfulness of the F indicator and to test the meaningfulness of the regression coefficients, the t indicator is
used. To test the application of the classic presuppositions of regression patterns (normality of the distribution of
the remaining sizes, lack of correlation between the residuals and lack of a linear connection between
independent variances), the drawing method, the Durbin Watson indicator and the indicator of variance increase
factors are used respectively. First, with attention to the combinational nature of the research's data, the Limer
and Hausman F tests are conducted to determine the type of the regression model pattern for financial reporting
quality.

Table 4. Results of F Limer test

Fixed effects F Statistics Degrees of freedom Sig.
Sectional 1.4310 (725.118) 0.0087

Table 5. Hausman test results

Random effects Statistics chi-sq Degrees of freedom Sig.
Sectional 157.7123 6 0.000

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As it can be seen in the tables above, the significance level of the F Limer test is less than .5, therefore, to
estimate the regression model, the cross-sectional fixed effects model should be used. On the other hand, the
significant level of the Hausman test is also less than .5, which indicates that the elevations width of the models
above cannot be considered as random phrases. As a result, the regression model of the financial reporting
quality is measured in the cross-sectional effects method.

Table 6. Measuring the quality of financial reporting model

Variables Coefficient Variables Standard error Statistics T VIF Sig.
Source 21475.02 7020.917 3.8512 - .0001
Operating cash flow of the current period .5992 .0512 14.4919 1.712 .0000
Changes in accounts receivable .1590 .0316 6.4036 1.652 .0000
Changes in accounts payable .2679 .0482 5.4305 1.498 .0000
Changes in inventory Merchandise .2856 .0420 4.6793 1.632 .0000
Depreciation expense .1265 .2027 2.1621 2.038 .0232
Other accruals .2090 .0231 4.0241 4.101 .0000
coefficient of determination .7406
Adjusted coefficient of determination .7104
Durbin-Watson statistic 2.3538
Sig model .000

As is stated above, to make sure that there is no correlation between the independent variances (regression
presupposition), the variance increase factor VIF was used. In the table above, the sizes of the VIF are less
than .5. Therefore, there is no correlation between the independent variances. Results of the table show that with
regard to the significance level which is less than .5, the total significance of the regression is affirmed at the
confidence level of 95 percent. Therefore, the regression variance coefficients are not zero simultaneously. It is
observed in the table that all the variances are in a confidence level of 95 percent in the significance relation with
the operational cash flow of the future term. In this way, 71.04 percent of the changes in the operational cash
flow of the future term is determined by the input variances in the model above.
4.1 Hypothesis Testing
The purpose of this research was to investigate the impact of auditor's specialty on financial reporting quality of
the listed companies in Tehran Stock Exchange. To do the analysis and test the hypotheses, a sample with a total
number of 119 listed companies in Tehran Stock Exchange in a period of 7 years (from 2007 to 2013) was
examined. In the research's main hypothesis, the impact of auditor's industry specialty on the financial reporting
quality was tested.
4.1.1 Results of Testing the First Subsidiary Hypothesis
H0: There is no meaningful relation between the auditor's industry specialty, based on the pattern of market share
based on total audited assets of the company, and financial reporting quality.
H1: There is a meaningful relation between the auditor's industry specialty, based on the pattern of market share
based on total audited assets of the company, and financial reporting quality.
∶ 0
∶ 0
4.1.2 Results of Testing Second Subsidiary Hypothesis
H0: There is no meaningful relation between the auditor's industry specialty, based on the pattern of market share
based on total auditor's fees, and financial reporting quality.
H1: There is a meaningful relation between the auditor's industry specialty, based on the pattern of market share
based on total auditor's fees, and financial reporting quality.
∶ 0
∶ 0

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In each of these assumptions, the quality of financial reporting as the dependent variable, auditor's specialty
based on the above mentioned patterns as the independent variable and the variables of company size, debt
relation and profit margins were considered as controlling variances in order to control the other possible
effective factors. To test the hypotheses, because the research dependent variable has two values (high financial
reporting quality with the value of one and low financial reporting quality with the value of zero), the Logit
regression model was utilized in the following way.
QFRi,t = β0 + β1 Auditor ¬ Spec i,t + β2 Sizei,t + β3 Debti,t + β4 Profi,t + ɛi,t
In this analyses, items such as the significance of the whole model, the significance of the model's coefficients of
descriptive variances and the model's descriptive capacity were analyzed.

Table 7. Results of the model impact, audit expertise on the quality of financial reporting
Description Model(1) Model(2)
Factor -0.3122 3.1192
Width of Source Statistics z -0.8283 3.0802
(statistics chance) 0.30 0.00
Factor 0.0503 0.1280
Auditor's expertise based on Total assets Statistics z 3.9865 2.8624
(statistics chance) 0.00 0.00
Factor 0.0061 0.0088
explanatory variables

Auditor Specialty based on audit fees Statistics z 0.0777 0.0901

(statistics chance) 0.93 0.92
Factor 0.0714
Company size Statistics z - 2.2305
(statistics chance) 0.02
Factor 0.0966
Ratio debt Statistics z - 1.8680
(statistics chance) 0.06
Factor 0.0231
Margin of profit Statistics z - 4.8800
(statistics chance) 0.00
Statistics lr 16.2900 107.3630
General significant review of model (statistics chance) 0.00 0.00
Check explanatory power of the model coefficient of determination 0.0466 0.2214

The results of the study of the research's model, with regard to the z indicator and its probability indicate the
significance of the auditor's specialty variance coefficient based on the pattern of the total assets in the financial
reporting quality model (indicator probability with an error level of less than .5). Since this coefficient is positive,
indicators show that the auditor's specialty has a meaningful and positive impact with the effectiveness level of
0.05 in model 1 and the effectiveness level of 0.128 on the financial reporting quality. This means that the
auditor's industry specialty increases the probability for financial reporting with a high quality.
4.2 Discussion
In this study, the main hypothesis states that the auditor's industry specialization has a significant impact on
financial reporting quality. Based on the collected observations from the statistical sample and hypothesis tests
using the Logit regression analysis, the main hypothesis of the impact of the industry specialized auditor on
financial reporting quality was not rejected. With regard to the probabilities' theory, the results can be applied to
the statistical group and it can be stated that the amount of the auditor's industry specialty has a direct impact on

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financial reporting quality of the companies. This result is in the same direction as the financial and accounting
literature. Based on the collected observations from the statistical sample and hypothesis test using the Logit
regression analysis, the research's first subsidiary hypothesis of the impact of the auditor's industry specialty
(based on the pattern of the market share based on the total audited assets of the company) on financial reporting
quality was not rejected. With regard to the results of this hypothesis, it can be stated that the approach of the
market share based on the total audited assets of the company introduces an industry specialized auditor as an
auditing institution distinguished from other competitors in terms of the total audited assets of the company in a
certain industry. Based on the collected observations from the statistical sample and using the Logit regression
analysis (based on the pattern of the market share based on the total auditor's fees) on financial reporting quality
was rejected.
5. Conclusion
Results of the hypotheses' tests showed that the auditor's industry specialty (based on the pattern of the market
share based on the auditor's total fees) has no meaningful impact on the financial reporting quality of the
statistical sample companies of this research. But, if the auditor's industry specialty (based on the pattern of the
total audited assets of the company) was to be evaluated, it would have a significant impact on financial
reporting quality. Therefore, it is concluded that the variance of the auditor's industry specialty is sensitive to the
type of the utilized coefficient used to evaluate it. Findings of this research apply with similar researches by
Krishnan (2003), Balsam et al. (2003), Karslvonagi (2004), Francis et al. (2004), Jenkins et al. (2006), Almoteiri
et al. (2009), Choueiri et al. (2010), Karjalynn (2011), Sun and Liu (2013), Etemadi et al. (2009), Nazemi
Ardakani (2012) and Alavi Tabari and Bazrafshan (2013). The results of the researches by the studies above in
general state that the industry specialized auditors' clients have lower voluntary commitment items, higher
profitability quality and less profit management in comparison with the non-specialized auditors. As a result, it
can be deducted that the clients' financial reporting quality which have the advantage of industry specialized
auditors is more. Finally, this research contradicts the results from the research done by Hasas Yeganeh et al.
(2012). The results of their research showed that there is no significant difference between the informational
content of the profit's commitment and financial parts in companies with industry specialized auditors with other
companies.
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