Dramatic changes in recent years in the audit market suggest the timeliness of an investigation of trends in auditor concentration and an extension of prior research (e.g., Danos and Eichenseher 1982). In recent press, large audit firms have claimed that specialization is a goal of increasing importance. Peat Marwick, for example, has restructured along industry lines, claiming to be recruiting professionals for national teams of multidisciplinary experts organized to “focus on the same industry to serve clients optimally.” On the other hand, litigation concerns might prompt auditors to diversify their risks by diversifying their clientele.
In this study, we examine trends in industry specialization from 1976 to 1993 and the industry factors which may affect specialization; whether market share increases are greater for audit firms classified as specialists; and whether the nation's largest audit firms have increased their market share in the industries which they have identified as their focus industries. We find evidence that concentration levels have increased over this period, consistent with the claims of the large audit firms. We find that auditor concentration levels are higher in regulated industries, in more concentrated industries and in industries experiencing rapid growth, but lower in industries with a high risk of litigation. Levels of concentration have increased over time in nonregulated industries providing evidence that scale economies or superior efficiencies of heavy-involvement auditors are not limited to regulated industries but extend to nonregulated industries as well. We also find that for the audit firms classified as market leaders at the beginning of the year, market share has increased over time, whereas market share has declined for firms with a smaller share at the beginning of the year. This suggests that there are returns to investing in specialization.
Political Price Cycles in Regulated Industries: Theory and Evidence