The Association between Client-specific Investment Opportunities and Audit Fees of Industry Specialists and Non-Specialists

Steven Cahan, Jayne Godfrey, Jane Hamilton, Debra Jeter

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Audit clients' investment opportunity sets (IOS) include firm-specific opportunities that are unique to the client, as well as opportunities generalizable to the client's industry and opportunities even more generically available to all firms. Prior research does not examine the variation in audit fees related to firm-specific IOS nor how firm-specific IOS affects the premiums charged by industry specialist auditors. We find that firm-specific IOS plays a distinct role in the pricing of audit services, leading to higher fees as the auditor demands compensation for increased audit risk. Further, we find that the ability of an industry specialist auditor to charge fee premiums is reduced in the case of clients that are highly differentiated based on firm-specific IOS, as the knowledge gleaned in auditing other clients within the industry is often not applicable to clients in more unique IOS environments. We contribute to the literature by showing that industry specialist premiums are not constant for firms in the same industry; rather, they reflect a trade-off between firm- and industry-specific knowledge.
    Original languageEnglish
    Pages (from-to)57-71
    JournalInternational Journal of Auditing
    Volume19
    Issue number2
    DOIs
    Publication statusPublished - 2015

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