Auditor Specialization, Auditor Dominance and Audit Fees: The Role of Investment Opportunities

Posted: 24 May 2008

See all articles by Steven F. Cahan

Steven F. Cahan

University of Auckland Business School

Jayne M. Godfrey

University of Auckland

Jane Hamilton

La Trobe University

Debra C. Jeter

Vanderbilt University - Accounting


A report issued by the U.S. General Accounting Office (GAO) in 2003 identified auditors' industry expertise as a critical factor for firms choosing an auditor, and highlighted the rather extreme levels of auditor concentration in some industries. We posit that the investment opportunity set (IOS) plays a fundamental role in determining whether an industry is an attractive target for auditor specialization. When industry-specific IOS is high, specialist auditors make costly investments in industry-specific knowledge, allowing them to offer a differentiated product and to create entry barriers for other audit firms. When the IOS of firms within an industry is relatively homogeneous, auditors can transfer such knowledge across clients in the industry more easily, resulting in cost savings and scale economies. However, greater homogeneity of IOS in an industry can also increase a client's aversion to sharing an auditor with its competitors because of concerns about transfers of proprietary information, suggesting that industries with relatively homogeneous IOS are less likely to be dominated by a single auditor. We show that auditor concentration in an industry relates positively to both the level and homogeneity of IOS in the industry, while auditor dominance relates negatively to industry IOS homogeneity. Further, we examine the effects of industry IOS on audit pricing.

Keywords: Auditor specialization, auditor dominance, audit fees, investment opportunities, auditor concentration

JEL Classification: G31, M49, L84

Suggested Citation

Cahan, Steven F. and Godfrey, Jayne M. and Hamilton, Jane Maree and Jeter, Debra C., Auditor Specialization, Auditor Dominance and Audit Fees: The Role of Investment Opportunities. Accounting Review, Forthcoming, Available at SSRN:

Steven F. Cahan

University of Auckland Business School ( email )

Faculty of Business & Economics
Private Bag 92019
New Zealand

Jayne M. Godfrey (Contact Author)

University of Auckland ( email )

12 Grafton Road
Auckland, 1010
New Zealand

Jane Maree Hamilton

La Trobe University ( email )

PO Box 199
Bendigo, Victoria 3550
61 3 54447292 (Phone)
61 3 54 447998 (Fax)

Debra C. Jeter

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States

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