A Review of Theories on Auditor Industry Specialisation

Abstract

Auditor industry specialisation is a strategy adopted by audit firms to differentiate themselves from competitors in fulfilling clients’ demands for better financial reporting quality. The concentration of resource and technology investments in a particular focus industry or a number of industries allows them to build their reputation as an industry expert. Hence, providing them with a competitive advantage and greater market power over their rivals. The aim of this paper is to discuss the various theories which explain the role of the industry specialist auditor in promoting financial reporting quality. A company’s financial reporting quality is normally associated with the company’s quality of reported earnings and the quality of its audit. The product differentiation theory, production efficiency theory, reputation theory, and spatial competition theory each have their own merit and relevance in providing distinct explanations on the demand and supply side of industry specialist auditors, and how industry specialisation strategies could have differential effects on the auditor’s fees and quality of services offered by the industry specialist auditors. In terms of implication and contribution, our paper would be of interest to academicians, practitioners, regulators, and policymakers in trying to understand the auditor industry specialisation phenomenon. Our paper also contributes to the literature as this is the first paper that comprehensively provides a synthesis and a holistic view of how these four theories complement each other in explaining the role of the industry specialist auditor in promoting financial reporting quality.