The effect of auditor characteristics on the quality of segment disclosures of diversified firms

Segment reporting provides valuable information for investors but is subject to substantial managerial discretion, making its quality uncertain. Although audit quality is generally expected to constrain misreporting, it is not obvious whether auditors meaningfully affect segment disclosures, given the discretion afforded by ASC 280 and auditors’ limited authority over segment definitions. This study investigates whether auditor characteristics such as firm size, industry specialization, and tenure, influence segment disclosure quality. Our results reveal that disclosure quality improves with auditor size and specialization. Tenure shows evidence consistent with nonlinearity: disclosure quality is higher in shorter engagements (less than five years) and is weaker in longer engagements in some specifications. Additional analyses show that auditor-driven improvements mitigate earnings management linked to diversification and increase the excess value of diversification. These findings suggest that the auditor’s role in segment reporting is neither mechanical nor guaranteed, but instead contingent on expertise and independence, offering new insights into how audit quality constrains discretion in one of the most opaque areas of financial reporting.