Auditor industry specialisation is a strategy adopted by audit firms to differentiate themselves from competitors in fulfilling clients’ demands for better financial reporting quality. The concentration of resource and technology investments in a particular focus industry or a number of industries allows them to build their reputation as an industry expert. Hence, providing them with a competitive advantage and greater market power over their rivals. The aim of this paper is to discuss the various theories which explain the role of the industry specialist auditor in promoting financial reporting quality. A company’s financial reporting quality is normally associated with the company’s quality of reported earnings and the quality of its audit. The product differentiation theory, production efficiency theory, reputation theory, and spatial competition theory each have their own merit and relevance in providing distinct explanations on the demand and supply side of industry specialist auditors, and how industry specialisation strategies could have differential effects on the auditor’s fees and quality of services offered by the industry specialist auditors. In terms of implication and contribution, our paper would be of interest to academicians, practitioners, regulators, and policymakers in trying to understand the auditor industry specialisation phenomenon. Our paper also contributes to the literature as this is the first paper that comprehensively provides a synthesis and a holistic view of how these four theories complement each other in explaining the role of the industry specialist auditor in promoting financial reporting quality.
Abbott, L. J., and Parker, S. (2000). Auditor Selection and Audit Committee Characteristics. Auditing: A Journal of Practice & Theory, 19 (2): 47-66.
Balsam, S., Krishnan, J., and Yang, J. S. (2003). Auditor Industry Specialization and Earnings Quality. Auditing: A Journal of Practice & Theory, 22 (2): 71-97.
Basioudis, I. G., and Francis, J. R. (2007). Big 4 Audit Fee Premiums for National and Office-Level Industry Leadership in the United Kingdom. Auditing: A Journal of Practice & Theory, 26 (2): 143-166.
Behn, B. K., Choi, J-H., and Kang, T. (2008) Audit Quality and Properties of Analyst Earnings Forecasts. The Accounting Review, 83 (2): 327-349.
Bills, K.L., Jeter, D. C., and Stein, S. E. (2015). Auditor Industry Specialization and Evidence of Cost Efficiencies in Homogenous Industries. The Accounting Review, 90 (5): 1721-1754.
Cahan, S. F., Godfrey, J. M., Hamilton, J., and Jeter, D. C. (2008). Auditor Specialization, Auditor Dominance, and Audit Fees: The Role of Investment Opportunities. The Accounting Review, 83: 1393–1423.
Cahan, S. F., Jeter, D. C., and Naiker, V. (2011). Are All Industry Specialist Auditors the Same? Auditing: A Journal of Practice & Theory, 30 (4): 191-222.
Cairney, T. D., and Young, G. R. (2006). Homogenous Industries and Auditor Specialization: An Indication of Production Economies. Auditing: A Journal of Practice and Theory, 25 (1): 49-68.
Caminal, R. and Vives, X. (1996). Why Market Shares Matter: An Information-Based Theory. Journal of Economics. 27 (2): 221-239.
Carson, E. (2009). Industry Specialization by Global Audit Firm Networks. The Accounting Review, 84 (2): 355-382.
Casterella, J., Francis, J., Lewis, B., and Walker, P. (2004). Auditor Industry Specialization, Client Bargaining Power and Audit Pricing. Auditing: A Journal of Practice & Theory, 23 (1): 49-66.
Causholli, M., De Martinis, M., Hay, D., and Knechel, W. (2010). Audit Markets, Fees and Production: Towards an Integrated View of Empirical Audit Research. Journal of Accounting Literature, 30: 167-215.
Chan, D., Ferguson, A., Simunic, D., Stokes, D. (2004). A Spatial Analysis and Test of Oligopolistic Competition in the Market for Audit Services. Working Paper. University of British Columbia.
Chi, H. Y., and Chin, C. L. (2011). Firm versus Partner Measures of Auditor Industry Expertise and Effects on Auditor Quality. Auditing: A Journal of Practice & Theory, 30 (2): 201-229.
Chin, C. L., and Chi, H. Y. (2009). Reducing Restatements with Increased Industry Expertise. Contemporary Accounting Research, 26 (3): 729-765.
Craswell, A. T., Francis, J. R., and Taylor, S.L. (1995). Auditor Brand Name Reputations and Industry Specialisations. Journal of Accounting & Economics, 20: 297-322.
Danos, P., and Eichenseher, J. W. (1982). Audit Industry Dynamics: Factors Affecting Changes in Client Industry Market Shares. Journal of Accounting Research, 20: 604–616.
DeAngelo, L. E. (1981). Auditor Size and Audit Quality. Journal of Accounting and Economics, 3 (3): 183-199.
DeFond, M. L., Francis, J. R., and Wong, T. J. (2000). Auditor Industry Specialization and Market Segmentation: Evidence from Hong Kong. Auditing: A Journal of Practice & Theory, 19 (1):49-66.
DeFond, M., and Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58 (2): 275-326.
DeFond, M. L., Francis, J. R., and Wong, T. J. (2000). Auditor Industry Specialization and Market Segmentation: Evidence from Hong Kong. Auditing: A Journal of Practice & Theory, 19 (1):49-66.
Doogar, R., and Easley, R. F. (1998). Concentration without differentiation: A new look at the determinants of audit market concentration. Journal of Accounting and Economics, 25: 235-253.
Dunn, K. A., and Mayhew, B. W. (2004). Auditor Industry Specialization and Client Disclosure Quality. Review of Accounting Studies, 9 (1): 35-58.
Eichenseher, J. W., and Danos, P. (1981). The Analysis of Industry-Specific Auditor Concentration: Towards an Explanatory Model. The Accounting Review, 56 (3): 479-492.
Ettredge, M., and Greenberg, R. (1990). Determinants of Fee Cutting on Initial Audit Engagements. Journal of Accounting Research, 28 (1): 198-210.
Ferguson, A., Francis, J. R., and Stokes, D. J. (2003). The Effects of Firm-Wide and Office-Level Industry Expertise on Audit Pricing. The Accounting Review, 78 (2): 429-448.
Fields, L. P., Fraser, D. R., and Wilkins, M. S. (2004). An investigation of the pricing of audit services for financial institutions. Journal of Accounting and Public Policy, 23 (1): 53–77.
Francis, J. R., Stokes, D. J., and Anderson, D. (1999). City Markets as a Unit of Analysis in Audit Research and the Re-Examination of Big 6 Market Shares. Abacus, 35: 185-206.
Francis, J. R., Reichelt, K., and Wang, D. (2005). The Pricing of National and City-Specific Reputations for Industry Expertise in the US Audit Market. The Accounting Review, 80 (1): 113-136.
Francis J. R. (2011). A Framework for Understanding and Researching Audit Quality. Auditing: A Journal of Practice & Theory, 30 (2): 125–152.
Fung, Y. K., Gul, F. A., and Krishnan, J. (2012). City-Level Auditor Industry Specialization, Economies of Scale, and Audit Pricing. The Accounting Review, 87 (4): 1281-1307.
Giroux, G., and Jones, R. (2007). Investigating the Audit Fee Structure of Local Authorities in England and Wales. Accounting and Business Research. 37 (1): 21-37.
Goodwin, J., and Wu, D. (2014). Is the effect of industry expertise on audit pricing an office-level or a partner-level phenomenon? Review of Accounting Studies, 19 (4): 1532-1578.
Green W. J. (2008) Are Industry Specialists More Efficient and Effective in Performing Analytical Procedures? A Multi-Stage Analysis. International Journal of Auditing, 12: 243 – 260.
Hammersley, J. S. (2006). Pattern identification and industry-specialist auditors. The Accounting Review. 81: 309–336.
Hay, D. C., Knechel, W. R., and Wong, N. (2006). Audit Fees: A Meta-analysis of the Effect of Supply and Demand Attributes. Contemporary Accounting Research, 23 (1): 141–91.
Hotelling, H. (1929). Stability in competition. The Economic Journal, 39(153) : 41–57.
Huang, H. W., Liu, L. L., Raghunandan, K., and Rama, D. (2007). Auditor Industry Specialization, Client Bargaining Power and Audit Fees: Further Evidence. Auditing: A Journal of Practice & Theory, 26(1): 147-158.
Kane, G. D., and Velury, U. (2004). The Role of Institutional Ownership in the Market for Auditing Services: An Empirical Investigation. Journal of Business Research, 57: 976–983.
Kharuddin, K. A. M., Basioudis, I. G., and Al Farooque, O. (2021). Effects of the Big 4 national and city-level industry expertise on audit quality in the United Kingdom. Journal of International Accounting, Auditing and Taxation, 43, 100398.
Kharuddin, K. A. M., Basioudis, I. G., and Hay, D. (2019). Partner industry specialization and audit pricing in the United Kingdom. Journal of International Accounting, Auditing and Taxation, 35, 57-70.
Knechel, W. R., Naiker, V., Pacheco, G. (2007), Does auditor industry specialization matter? Evidence from market reaction to auditor switches. Auditing A Journal of Practice and Theory, 26, 19-45
Lim, C. Y., and Tan, H. T. (2008). Non-Audit Service Fees and Audit Quality: The Impact of Auditor Specialization. Journal of Accounting Research, 46(1):199-246.
Low, K. Y. (2004). The Effect of Industry Specialization on Audit Risk Assessments and Audit Planning Decisions. The Accounting Review, 79: 201–9.
Mayhew, B. W., and Wilkins, M. S. (2003). Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charges to Firms Going Public. Auditing: A Journal of Practice and Theory, 22 (2): 33-52.
Menon, K., and Williams, D. D. (2001). Long-term trends in audit fees. Auditing: A Journal of Practice & Theory, 20(1):115-136.
Kharuddin, M. K. A., and Basioudis, I. G. (2018). Big 4 audit fee premiums for national?and city?specific industry leadership in the UK: Additional evidence. International Journal of Auditing, 22(1), 65-82.
Moroney, R. (2007) Does Industry Expertise Improve the Efficiency of Audit Judgement? Auditing: A Journal of Practice & Theory, 26(2):69-94.
Nagy, A. L. (2014). Audit Partner Specialization and Audit Fees. Managerial Auditing Journal, 29(6): 513-526.
Neal, T. L., and Riley,R. R. (2004). Auditor Industry Specialist Research Design. Auditing: A Journal of Practice & Theory, 23(2):169–177.
Numan, W., and Willekens, M. (2012). An Empirical Test of Spatial Competition in the Audit Market. Journal of Accounting and Economics, 53(1-2):450-465.
Numan, W., and Willekens, M. (2014). Competitive Pressure, Audit Quality and Industry Specialization. Working paper. Katholieke Universiteit Leuven, Belgium.
Owhoso, V. E., Messier, W. F., and Lynch, J. (2002). Error Detection by Industry-Specialized Teams During the Sequential Audit Review. Journal of Accounting, 40: 883–900.
Palmrose, Z. (1986). Audit Fees and Auditor Size: Further Evidence. Journal of Accounting Research, 24(1): 97-110.
Payne, J. L. (2008). The influence of audit firm specialization on analysts’ forecast errors. Auditing: A Journal of Practice & Theory, 27(2):109–136.
Pearson, T., and Trompeter, G. (1994). Competition in the Market for Audit Services: The Effect of Supplier Concentration on Audit Fees. Contemporary Accounting Research, 11(1):91–114.
Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. New York, NY: Free Press.
Power, M. (1996), Making things auditable. Accounting, Organizations and Society, 21(2-3):289-315.
Reichelt, K. J., and Wang, D. (2010). National and Office-Specific Measures of Auditor Industry Expertise and Effects on Audit Quality. Journal of Accounting Research, 48(3):647–686.
Shapiro, C. (1989). Theories of oligopoly behavior. In: Schmalansee, R., Willig, R. (Eds.), Handbook of Industrial Organization, North-Holland, New York.
Simunic, D. A. (1980). The Pricing of Audit Services: Theory and Evidence. Journal of Accounting Research, 18(1):161-190.
Solomon, I., Shields, M., and Whittington, O. (1999). What Do Industry-Specialist Auditors Know? Journal of Accounting Research, 37: 191–208.
Sun, J., and Liu, G. (2013). Auditor Industry Specialization, Board Governance, and Earnings- Management. Managerial Auditing Journal, 28 (1): 45–64.
Watts, R., and Zimmerman, J. (1981), The markets for independence and independent auditors, Unpublished manuscript (University of Rochester, Rochester, NY).
Willenborg, M. (2002). Discussion of Brand Name Audit Pricing, Industry Specialization and Industry Leadership Premiums Post Big 8 and Big 6 Mergers. Contemporary Accounting Research,19: 111-117.
Yardley, J. A. N., Kauffman, L., Cairney, T. D., and Albrecht, D. (1992). Supplier Behavior in the U.S. Audit Market. Journal of Accounting Literature, 11 (1): 151-184
Zerni, M. (2011). Audit Partner Specialization and Audit Fees: Some Evidence from Sweden. Contemporary Accounting Research, 29 (1): 312-340.
In-Text Citation: (Kharuddin & Basioudis, 2022)
To Cite this Article: Kharuddin, K. A. M., & Basioudis, I. G. (2022). A Review of Theories on Auditor Industry Specialisation. International Journal of Academic Research in Business and Social Sciences, 12(9), 1619– 1631.
Copyright: © 2022 The Author(s)
Published by Knowledge Words Publications (www.kwpublications.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode
