An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Steven F. Cahan
University of Auckland Business School

Jayne M. Godfrey
Monash University

Jane M. Hamilton
La Trobe University

Debra C. Jeter
Vanderbilt University

Abstract: In 1993, the U.S. General Accounting Office identified industry specialization as a key driver of audit firm consolidation and highlighted the extreme levels of auditor concentration in some industries (GAO, 1993). Using auditor concentration to measure industry specialization, we examine why auditor specialization differs across industries. We argue that when industry-specific IOS is high, auditors will make costly industry-specific investments that allow them to offer a differentiated product and to create entry barriers for other audit firms. However, when a large component of IOS is specific to individual firms within an industry so that IOS is highly variable within the industry, auditors’ knowledge requirements are highly specific to those firms and it is more difficult to transfer knowledge and spread costs across clients in that industry. We present evidence that auditor specialization is increasing in industry IOS levels and decreasing in within-industry IOS variability.

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