Industry specialization and audit fees: The effect of industry type and market definition

Date of Award


Degree Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration


Randal J. Elder


Industry specialization, Audit fees, Market definition

Subject Categories

Accounting | Business | Business Administration, Management, and Operations


This research examines the effects of industry specialization on audit fees in the U.S. audit market, and whether specialist pricing depends upon industry regulation and use of a narrower market share measure. Mixed results for the relation between auditor specialization and audit fees in prior studies may be attributable to the countervailing effects of specialist audit quality and scale economies.

This study selects two regulated (SIC 131 and SIC 602) and two non-regulated (SIC 357 and SIC 581) industries to investigate the auditor specialist fee effect. Auditor specialists in non-regulated industries are hypothesized to be able to charge an audit fee premium for their higher quality services. In contrast, specialists in regulated industries are hypothesized to charge lower audit fees because of scale economies that exist in regulated industries. The difference in audit fees charged between specialists in non-regulated industries and in regulated industries is hypothesized to be significantly positive. Further, one possible explanation for the lack of a specialist premium in the overall U.S. market is that specialization is based on market share in narrower local/regional markets. Accordingly, a narrower market share measure is used to examine whether industry specialists charge higher audit fees than nonspecialists.

Audit fee regression models are used to investigate the auditor specialist fee effect in industries and market segments. Variables used in the audit fee models are selected from the Compustat database and collected from audit fee surveys.

The test results indicate that non-regulated auditor specialists charge higher audit fees, although mixed results are reported for regulated specialists. Further, specialists in non-regulated industries charge significantly higher fees than specialists in regulated industries, as expected. However, using a narrower (i.e., state) market share measure to define specialists, a specialist fee effect only exists in one regulated industry. Further analysis indicates that Big 5 industry specialists charge higher fees than Big 5 industry nonspecialists in non-regulated industries, consistent with Craswell et al. (1995). These additional results provide evidence that the within Big 5 specialist fee effect exists in the four industries selected.


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