Homogenous Industries and Auditor Specialization: An Indication of Production Economies

Timothy D. Cairney · George R. Young

82 citations0/0 files storedAuditing A Journal of Practice & Theory

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Auditing, Earnings Management, Governance Merger and Competition Analysis Corporate Governance and Financial Management

Abstract

In this study, we examine the association between industry homogeneity and auditor specialization. We find a significant association between our proxies for industry homogeneity (change in industry-member operating expenses) and auditor specialization (auditor concentration and auditor focus) after controlling for extent of industry regulation, litigiousness, growth, client-industry concentration, and the number of industry members. The positive relation between our specialist proxies and industry homogeneity indicates that auditors seek additional firms to audit in industries in which members have similar operations. This suggests that auditor specialization provides a cost-based competitive advantage because the cost of developing expertise is spread over more clients. Thus, in contrast to recent criticisms of auditor concentration, specialization results in more efficient audits.

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1995Auditor brand name reputations and industry specializations 2003Auditor Industry Specialization and Earnings Quality 2004Audit Firm Industry Specialization and Client Disclosure Quality 2003Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public 1999Industry Specialization by Auditors 2004Auditor Industry Specialization, Client Bargaining Power, and Audit Pricing 2004The Effects of Industry Specialization on Audit Risk Assessments and Audit-Planning Decisions 2004Auditor Industry Specialist Research Design

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