The Association between Client-Specific Investment Opportunities and Audit Fees of Industry Specialists

35 Pages Posted: 7 Sep 2013 Last revised: 2 Sep 2014

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

Date Written: 2013

Abstract

Audit clients’ investment opportunity sets (IOS) include firm-specific opportunities that are unique to the client, as well as opportunities generalizable to the client’s industry and opportunities even more generically available to all firms. Prior research does not examine the variation in audit fees related to firm-specific IOS nor how firm-specific IOS affects the premiums charged by industry specialist auditors. We find that firm-specific IOS plays a distinct role in the pricing of audit services, leading to higher fees as the auditor demands compensation for the investment in firm-specific knowledge necessary to conduct the audit or for increased audit risk. Further, we find that the ability of an industry specialist auditor to charge fee premiums is reduced in the case of clients that are highly differentiated based on firm-specific IOS. We contribute to the literature by showing that industry specialist premiums are not constant for firms in the same industry; rather, they reflect a trade-off between firm- and industry-specific knowledge.

Keywords: Industry specialization, audit fees, specialist premiums, investment opportunities, auditor expertise, industry-specific knowledge, client-specific knowledge, opportunity set, pricing of audit services, auditor market share

Suggested Citation

Cahan, Steven F. and Godfrey, Jayne M. and Hamilton, Jane Maree and Jeter, Debra C., The Association between Client-Specific Investment Opportunities and Audit Fees of Industry Specialists (2013). Vanderbilt Owen Graduate School of Management Research Paper No. 2321690. Available at SSRN: https://ssrn.com/abstract=2321690 or http://dx.doi.org/10.2139/ssrn.2321690

Steven F. Cahan

University of Auckland Business School ( email )

Faculty of Business & Economics
Private Bag 92019
Auckland
New Zealand

Jayne M. Godfrey

University of Auckland ( email )

12 Grafton Road
Auckland, 1010
New Zealand

Jane Maree Hamilton

La Trobe University ( email )

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

Debra C. Jeter (Contact Author)

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States

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