A Theory of ‘Why and How’ Audit Firms Choose to Specialize

Forthcoming European Accounting Review

57 Pages Posted: 18 Feb 2021

See all articles by Esther Gal‐Or

Esther Gal‐Or

University of Pittsburgh

Ronen Gal-Or

Bentley University - Department of Accountancy

Date Written: February 9, 2021


We examine analytically the strategic path auditors take towards becoming industry specialists in terms of their investments in the acquisition of industry specific knowledge and their pricing behavior. We identify characteristics of the competitive environment that provide incentives to improve audit quality as accounting firms strive to achieve industry specialization. These characteristics include the extent of uniqueness of the accounting knowledge relevant to the industry and the extent to which it is difficult for auditors to differentiate themselves from competitors by using mechanisms other than industry specialization. We argue that both the initial investments in improving quality and the experience gained by attracting a bigger group of clients play a role in achieving specialization. Serving more clients fosters learning and cultivates enhanced industry expertise. In order to cultivate such learning, our model predicts that the auditor lowers his fees in early stages of his journey to achieving specialization in order to attract a larger group of new clients. In contrast to prior studies, our analysis examines factors influencing the supply of rather than the demand for industry specialization.

Keywords: Audit Markets, Audit Quality, Industry Specialization, Industry Uniqueness, Price Competition, Analytical Model

JEL Classification: D43, L11, L13, L15, L21, L84, M41, M42, M49

Suggested Citation

Gal‐Or, Esther and Gal-Or, Ronen, A Theory of ‘Why and How’ Audit Firms Choose to Specialize (February 9, 2021). Forthcoming European Accounting Review, Available at SSRN: https://ssrn.com/abstract=3782925

Esther Gal‐Or

University of Pittsburgh ( email )

135 N Bellefield Ave
Pittsburgh, PA 15260
United States

Ronen Gal-Or (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics