The relationship between political relations with audit quality and auditor industry expertise

• Published date: 01 December 2022
• Author: Jalil Khaksar,Mahdi Salehi,Mahmoud Lari Dashtbayaz
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2780

RESEARCH ARTICLE

The relationship between political relations with audit

quality and auditor industry expertise

Jalil Khaksar

1

| Mahdi Salehi

2

| Mahmoud Lari Dashtbayaz

3

1

Accounting Department, Qaenat Branch,

Islamic Azad University, Qaenat, Iran

2

Department of Economics and Management,

Ferdowsi University of Mashhad,

Mashhad, Iran

3

Department of Economics and Administrative

Sciences, Ferdowsi University of Mashhad,

Mashhad, Iran

Correspondence

Mahdi Salehi, Department of Economics and

Management, Ferdowsi University, Mashhad,

Iran.

Email: mehdi.salehi@um.ac.ir

The present study assesses the relationship between political relations, audit quality,

and auditor industry expertise. In other words, this paper attempts to answer the

question of “whether the political relations can enhance the audit quality and auditor

industry expertise or not.”For this study, the multivariate regression model is used

for hypothesis testing. Using the multivariate regression model, research hypotheses

were also tested using a sample of 768 year-firm listed on the Tehran Stock

Exchange during 2013–2018. The results show a significant and negative relationship

between political relations with audit quality and expertise, which means firms with

high political relations increase competition in the audit market and lower the audit

quality.

KEYWORDS

audit quality, auditor industry expertise, political relations

1|INTRODUCTION

Auditor expertise indica tes the auditor's special ization, experience,

knowledge, and ability i n exploring existing biase s in financial state-

ments (Salehi, Moradi , & Paiydarmanesh, 2017b). Audit firms provide

the staff's required training and apply the industry's most updated

technology to increase au dit quality. They try to elev ate their credit

and prestige by acquiring industry specialization and presenting

high-quality works (Gramling & Stone, 2001). Dunn and May-

hew (2004) notice that specialization can increase audit quality and,

finally, financial re porting quality. Moreover, Balsam e t al. (2003)find

a positive relationshi p between specialized aud itors and financial

reporting quality. The results of Romanus et al. (2008) show a nega-

tive relationship between specialized industry auditors and financial

restatement. Ming et al. (2017)andLiuetal.(2016) posit that firms

with political relation s search for high-quality au ditors. According to

these studies, auditor nar cissism lowers the audi t quality because

audit quality derives from auditors' quality of judgment and decision.

So, auditors should be responsible for their performance and the

results of audit reports. Auditors' competency to deal with different

situations and making high-quality judgments relies on their

attempts to improve eff iciency (Salehi & Dastan poor, 2018;Salehi,

Jafarzadeh, & Nourbakh shhosseiny, 2017a). Hence, firms with politi-

cal relations also try to enh ance their political rela tions interests to

conceal any intentional an d misleading action in the ir financial

reports to investors (Leuz & Oberholzer, 2003). Moreover, since

such firms are dealing wit h organizational proble ms (Bliss &

Gul, 2012; Boubakri et al., 2012), they are known as hi gh-risk firms,

so the shareholders of such firms try to find high-quality auditors to

prevent such actions (M ing et al., 2017). Thus, firms wi th political

relations select larg e and high-quality audit ors to increase account -

ing information (Gued hami et al., 2014; Liu et al., 2016). There are

currently different definitions of audit quality in society. One of the

most important and oldest p roposed by DeAngelo (1981) descr ibed

audit quality as “market evaluation from the probability that auditors

explore significant de viations in financial st atements and report

them.”Like Titman and Tr ueman (1986), other scholar s believe that

the accuracy of publish ed information by the aud itor is an index for

audit quality. Accordi ng to DeAngelo (1981), using a crit erion or

index directly associated wi th audit quality is extremely e conomical

in terms of time and cost to measure the audit quality, which is non-

tangible. Therefore, he proposes the audit firm's size as an available

[Correction Statement: Correction added on 11 February 2022 after first online publication:

The Department's and City's name in the first affiliation have been corrected to “Department

of Accounting”and “Qaenat”respectively in this version.]

Received: 4 March 2021 Revised: 17 September 2021 Accepted: 3 October 2021

DOI: 10.1002/pa.2780

J Public Affairs. 2022;22(Suppl. 1):e2780. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons Ltd. 1of8

https://doi.org/10.1002/pa.2780