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Audit Industry Structure: How a Client’s Need for Privacy and Industry Expertise Affects Auditor Alignment
R. Mithu Dey,
Rochester Institute Of Technology
ABSTRACT. Competing needs for industry expertise versus privacy have opposing effects on auditor concentration. The preference for privacy motivates a client to select an auditor that differs from its competitors to avoid disclosure of proprietary information to its competitors. On the other hand, a preference for industry expertise motivates a client to select the same auditor as its competitors. This study considers auditor alignments to examine the effect of a client’s potentially conflicting needs for privacy and industry expertise on auditor concentration. The method examines the distribution of auditor-client alignments assuming that alignments occur randomly. It then examines the observed distribution within the random assignment to consider whether the privacy or expertise motive dominates. At the client industry level, I find that clients in a dominant firm industry structure prefer privacy; whereas clients in a competitive market structure prefer expertise.
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