A RE-EXAMINATION OF THE INDUSTRY SPECIALIST AUDIT FEE PREMIUM

This paper analyzes the effects of using various definitions and measures of auditor industry specialization in empirical audit research. Industry specialist (ISP) auditors are auditors who have developed a specific expertise in their industry and who are therefore able to provide higher quality audits. This industry expertise provides them with a superior reputation and allows them to obtain an industry specialist fee premium. On a sample of 29,726 US-listed firms over the 2000-2010 period, we computed and compared 35 ISP measures. We find that the use of different definitions of auditor industry specialization results in inconsistent classifications of audit firms as specialists (or not) in a given industry. We further demonstrate that this lack of consistency between ISP measures is significant and represents a serious measurement issue as it questions the validity of the ISP fee premium estimates. We find that the results regarding the significance, sign and magnitude of the fee premium paid to ISP auditors are strongly dependent on the choice of the ISP measure. Our analysis suggests that the measures of industry specialization employed in empirical research have a low degree of internal and external construct validity.