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    Are All Industry Specialist Auditors the Same?
    research summary posted October 13, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 11.0 Audit Quality and Quality Control 
    Are All Industry Specialist Auditors the Same?
    Practical Implications:

    The results have implications on two fronts. First, the findings indicate that auditors pursue different production and pricing strategies in different segments of the market, suggesting that the Big 4 audit firms respond to the competitive pressures in each submarket. Second, the evidence raises questions about the construct validity of market share-based measures of industry specialization, which have been used extensively in the literature. The evidence suggests that auditors who obtain a large market share by auditing a large proportion of the industry sector may actually do so by producing lower quality, lower cost audits. As such, these auditors are not acting as true specialists in the sense of using specialized training and knowledge to raise the quality of the audit performed.


    Cahan, S. F., D. C. Jeter, and V. Naiker. 2011. Are All Industry Specialist Auditors the Same? Auditing: A Journal of Practice & Theory 30 (4): 191-222.

    audit fees, audit quality, auditor market share, industry specialization, market segmentation, product differentiation
    Purpose of the Study:

    Auditor industry specialization continues to attract considerable attention in the literature. This may reflect the importance that clients place on industry specialization, e.g., 80 percent of companies viewed industry expertise or specialization as being an important factor in choosing an auditor. Most commonly, archival studies identify industry specialist auditors using a market share-based measure where a significant share, or an industry leading share, of the industry’s audit fees is used to designate specialists. However, a market share-based measure is problematic because market share depends jointly on the proportion of clients audited and the average size of those clients. For example, it is possible to attain a large industry market share by auditing a few relatively large clients in an industry or many relatively small ones. The question the authors examine is as follows: Are industry specialists who obtain a high market share in disparate ways similar in terms of product (audit) quality and price (audit fees)?

    Design/Method/ Approach:

    The authors begin with all client-years from 2003 through 2007 with requisite data available from Compustat and Audit Analytics. For the audit fee sample, the data requirement to compute the control variables results in a final sample of 9,565 client-year observations. For the discretionary accruals model, the additional data requirements needed to estimate discretionary accruals and the control variables for Equation (3) result in a final sample of 9,396 client-year observations. Sixty-one industries are represented by observations in both the audit fee and discretionary accruals samples. 


    The authors find evidence of higher (lower) audit quality when the auditor attains a high market share by auditing a lower (higher) proportion of clients in the industry. Combined, the findings suggest that industry specialists who gain market share by auditing a small proportion of clients in an industry pursue a product differentiation strategy, offering a higher quality, but more costly, audit. On the other hand, those specialists who gain market share by auditing a large proportion of clients follow a cost minimization strategy, competing on price and sacrificing quality. The authors do not find any evidence that the Big 4 operates as a tight oligopoly either in the overall audit market or within industry markets, whether defined at the national or local level. In summary, the results suggest that not all industry specialists are the same.

    Audit Quality & Quality Control, Audit Team Composition, Engagement Management
    Audit Fees & Fee Negotiations, Use of Specialists (e.g. financial instruments – actuaries - valuation)