Industry Specialization and Auditor Quality in U.S. Markets

40 Pages Posted: 17 May 2005

See all articles by Michael T. Stein

Michael T. Stein

Old Dominion University

Brian D. Cadman

University of Utah - David Eccles School of Business

Date Written: July 2007


This study investigates the relation between audit quality, auditor industry market share, and audit fees. Prior literature has asserted that audit providers with high market shares can be designated as industry specialists and that the fee premiums that sometimes attach to these auditors is evidence of a quality differentiated audit product. Using data from the U.S. audit market for the fiscal year 2003 we extend this literature by investigating the relationships among audit fee premiums, auditor market shares, and two dimensions of audit quality: external reporting and economies of scope in providing joint audit and non-audit services. We find little evidence to support the conjecture that high market share auditors provide increased audit quality. Further, we find that most auditors with high market shares do not seem to charge a fee premium. To the contrary, we report that the high market share fee premiums found in pooled (across industry) tests are primarily attributable to a small set of industries in which the high market share (specialist) auditor has a dominant position. This leads us to conclude that the available evidence is more supportive of the hypothesis that high-market share firms are extracting rents than the hypothesis that these auditors are providing a quality differentiated product.

Keywords: auditor specialization, discretionary accruals, earnings quality, auditor technology

JEL Classification: L84, M49

Suggested Citation

Stein, Michael T. and Cadman, Brian D., Industry Specialization and Auditor Quality in U.S. Markets (July 2007). Available at SSRN: or

Michael T. Stein (Contact Author)

Old Dominion University ( email )

Strome College of Business
Norfolk, VA VA 23529
United States
17576835495 (Phone)

Brian D. Cadman

University of Utah - David Eccles School of Business ( email )

1645 Campus Center Drive
Salt Lake City, UT 84112
United States
801-585-9517 (Phone)


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