Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public

31 Pages Posted: 20 Aug 2002

See all articles by Brian W. Mayhew

Brian W. Mayhew

University of Wisconsin - Madison - Department of Accounting and Information Systems

Michael S. Wilkins

University of Kansas

Date Written: July 11, 2002

Abstract

This paper examines IPO assurance fees to assess the use of industry specialization as a differentiation strategy by audit firms. Theory suggests that as an audit firm's share of a client industry increases their costs will decrease and their service quality to that industry will increase. In this setting, the impact of industry specialization on fees is indeterminate. We extend existing theory by considering both the supply and the demand for industry specialization. We conclude that the market for audit services is generally price-competitive, suggesting that auditors will be forced to share cost savings with clients. However, when an audit firm is able to differentiate its services from competitors it should be able to earn a modest premium. We test and find support for our conjectures using U.S. IPO audit fee data from 1991 to 1997.

Keywords: industry specialization, economies of scale, strategy, audit fees, initial public offerings

JEL Classification: L11, L13, L84, M49, G24

Suggested Citation

Mayhew, Brian W. and Wilkins, Michael S., Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public (July 11, 2002). Available at SSRN: https://ssrn.com/abstract=319147 or http://dx.doi.org/10.2139/ssrn.319147

Brian W. Mayhew (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-2714 (Phone)
608-263-0477 (Fax)

Michael S. Wilkins

University of Kansas ( email )

Capitol Federal Hall
1654 Naismith Dr.
Lawrence, KS 66045
United States

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