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    The Validity of Auditor Industry Specialization Measures
    research summary posted June 15, 2016 by Jennifer M Mueller-Phillips, last edited July 26, 2016, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    The Validity of Auditor Industry Specialization Measures
    Practical Implications:

     This study draws attention to the potentially large issues involved with inconsistencies in the measurement of auditor industry specialization with a focus on audit fees and audit quality. The findings of this study suggest that audit fee-based measures should probably be prioritized by researchers and that previous empirical findings based on other measurement variables need to be re-examined. Results also show that choosing a market share approach or a portfolio approach has very significant consequences, so the decision should not be made absent-mindedly. Furthermore, the choice of absolute versus relative measures of ISP if not neutral, either, and the sensitivity tests indicated that ISP calculations are very sensitive to the industry classification used.


     Audousset-Coulier, S., A. Jeny, and L. Jiang. 2016. The Validity of Auditor Industry Specialization Measures. Auditing: A Journal of Practice and Theory 35 (1): 139-161.

    auditor industry specialization and construct validity
    Purpose of the Study:

    Industry specialist auditors are auditors who have developed a specific expertise and are therefore able to provide high quality and more efficient services to their clients. Despite being widely examined in literature, the effect of auditor industry specialization (ISP) has no wholly agreed upon degree of measurement with empirical results exhibiting inconsistencies and uncertainties.  In fact, a multiplicity of measures of industry specialization has been developed over the years. These inconsistencies found with the measurement of auditor industry specialization have led to issues in audit pricing and audit quality. The audit pricing models inconsistencies, in particular, are a challenge for researchers in archival auditing research; the results of their studies are highly sensitive to ISP measures. This study focuses on the measurement issues of ISP, with the hope to be the first study to conduct a comprehensive test of the consistency among different combinations of measurement variables, such as audit fee, client size, and number of clients, and approaches, such as absolute or relative market shares, absolute or relative portfolio shares, and weighted market shares. 

    Design/Method/ Approach:

    The authors use an audit pricing model and an earnings quality model as their empirical fields of study to present empirical evidence about the consequences of using different proxies for ISP on audit pricing and earnings quality research results. The data, which is from 2000 to 2010, is used to compute 30 different measures of ISP in order to test their internal and external construct validity.  

    • The authors find that the choice of the type of measure used to identify industry specialists has a significant influence on the designation of auditors as industry specialists.
    • The authors show that the use of five different assignment approaches modifies the classification of auditors as specialists or not.
    • The authors show that the use of different calculating variables to compute these shares also leads to significant differences of classification.
    • The authors find in the audit pricing model test that the alternative use of the 30 ISP variables in an audit fee model leads to the determination of a significant ISP fee premium in 14 cases, to the determination of a fee discount in 6 cases, and to nonsignificant results in 10 cases.
    • The authors find in the earnings quality test that industry specialization is found to significantly reduce the level of discretionary accruals in only five cases compared to the 21 cases where ISP measures were associated with higher levels of discretionary accruals and with nonsignificant results found in four cases.
    Audit Quality & Quality Control, Audit Team Composition
    Industry Expertise – Firm and Individual