Academic journal article Auditing: A Journal of Practice & Theory

Industry Specialization by Auditors

Academic journal article Auditing: A Journal of Practice & Theory

Industry Specialization by Auditors

Article excerpt


Dramatic changes in recent years in the audit market suggest the timeliness of an investigation of trends in auditor concentration and an extension of prior research (e.g., Danos and Eichenseher 1982). In recent press, large audit firms have claimed that specialization is a goal of increasing importance. Peat Marwick, for example, has restructured along industry lines, claiming to be recruiting professionals for national teams of multidisciplinary experts organized to "focus on the same industry to serve clients optimally." On the other hand, litigation concerns might prompt auditors to diversify their risks by diversifying their clientele.

In this study, we examine trends in industry specialization from 1976 to 1993 and the industry factors which may affect specialization; whether market share increases are greater for audit firms classified as specialists; and whether the nation's largest audit firms have increased their market share in the industries which they have identified as their focus industries. We find evidence that concentration levels have increased over this period, consistent with the claims of the large audit firms. We find that auditor concentration levels are higher in regulated industries, in more concentrated industries and in industries experiencing rapid growth, but lower in industries with a high risk of litigation. Levels of concentration have increased over time in nonregulated industries providing evidence that scale economies or superior efficiencies of heavy-involvement auditors are not limited to regulated industries but extend to nonregulated industries as well. We also find that for the audit firms classified as market leaders at the beginning of the year, market share has increased over time, whereas market share has declined for firms with a smaller share at the beginning of the year. This suggests that there are returns to investing in specialization.

Key Words: Industry specialization, Auditor concentration.

Data Availability: Data are available from sources identified in the paper.

Claims by large auditors suggest that industry specialization is a goal of increasing importance for some, if not all, of the country's largest auditors. This implies that these firms perceive a benefit from specialization, whether increased market share, profits, audit quality, or merely the maintenance of market share in a competitive environment. (1) Specialization was also specified as being critical for the survival of the CPA profession at a recent CPA Vision Project National Future Forum held in January 1998. Specialization was one of five top issues facing the profession as identified by member delegates from around the country attending over a hundred Future Forums during the past fall (AICPA 1998).

With the lifting of bans on advertising and direct solicitation, the audit market has undergone significant change since most of the previous research studies investigating auditor specialization. Other changes include a decline in the relative importance of audit services as a proportion of total accounting firm revenue, an increase in the importance of international services and an increase in litigation concerns. In this environment, auditors may strive to maintain or increase share by increasing quality and/or reducing costs via their specialization efforts. Regulators in the U.S. and abroad have expressed concern about the impact of industry concentrations on competition in the audit market.

The recent mergers of the firms previously referred to as the Big 8 have also drawn the attention of regulators concerned about the impact on concentration rates and market structure (McDonald et al. 1998). These mergers suggest not only the competitiveness of the market but also a potential joining of expertise or specialization skills. For example, Price Waterhouse claims that their plans to merge with Coopers & Lybrand arose in part from complementary strengths in industry markets and cited, as an example, Coopers & Lybrand's strength in telecommunications as complementary to Price Waterhouse's strength in entertainment and media. …

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