EXAMINING THE RELATIONSHIP BETWEEN EQUITY INCENTIVES, FINANCIAL MISREPORTING, AND AUDITOR INDUSTRY EXPERTISE

Abstract

This study examines whether auditor industry expertise can reduce incidents of financial misreporting, particularly in the context of equity-based performance incentives for executives. Misreporting can occur as a result of executives managing earnings or committing fraudulent financial reporting to meet compensation goals. By analyzing data from non-financial firm between2006-2014, this study evaluates the correlation between auditor industry expertise and its influence on the relationship between equity incentives and financial misreporting, as measured via abnormal accruals, just meeting or beating analysts' earnings forecasts, and financial restatements. The results suggest that auditor industry expertise mitigates the relationship between financial misreporting and equity incentives. This finding highlights the importance of auditor industry expertise in reducing corporate misbehavior and improving financial reporting credibility