AN EXPLORATIVE STUDY OF THE INTERNATIONAL CONSISTENCY OF AUDITOR SPECIALIZATION

Industry specialization can be seen as a differentiation strategy of the auditor. Previous research demonstrates the advantages of such a strategy (e.g., DeFond et al., 2000; Balsam et al., 2003; Dunn and Mayhew, 2004). The literature uses two constructs to measure specialization, the market share of an auditor in a specific market, and a portfolio approach focusing on the major industries in the portfolio of clients of the auditor (e.g., Hogan and Jeter, 1999; Balsam et al., 2003; Neal and Riley, 2004). The objective of this paper is to investigate whether auditor specialization is consistent across countries. Compared to competing auditors, an industry specialized auditor must have unique assets that result in clients in that specific industry systematically choosing the specialist auditor. Logically, this specialist knowledge can translate into an audit methodology that is specifically suited for this industry. Large audit firms make significant investments in developing tools to assist auditors in applying this methodology. As the specialized knowledge of auditors can be transferred from one country to another, we can expect that industry specialization is consistent across countries for international audit firms. If an audit approach, specifically designed for an industry, is transferred through manuals to another country, one can expect that the audit firm has the same competitive advantage in that other country. This would result in consistent patterns in international auditor specialization. If this can not be observed, it might mean that the audit firm does not have an audit methodology that results in competitive advantage or that this methodology is not transferred from one country to another. We use data on 55 235 European companies to analyze auditor specialization and find a relative degree of consistency across countries. The paper starts with a review of the relevant literature, describes our data and presents the results of our analysis.