A Comparison of Auditor's Self-Reported Industry Expertise and Alternative Measures of Industry Specialization

Auditing research requiring measures of auditor industry expertise have relied largely on proxies for industry expertise based on the market shares of auditors. These studies have yielded different results for the audit market outcomes examined. This study systematically documents differences in the proxies for each of the Big 6 and a subset of non-Big 6 auditors. Next, it examines two alternative measures, one based on market shares in large and small client segments, and the other on the industry's share in the auditor's portfolio. Finally, it examines whether the alternative measures are likely to be better proxies for auditor industry expertise. The market shares-based measures and the alternative measures are compared with an independent outside indicator of auditors' industry expertise, the audit firms' postings of their industry specialization in their home pages on the World Wide Web. The numbers indicate that the auditors' self-reported specializations are not correlated with market shares for most auditors. However, the self-reported specializations are more closely associated with one of the alternative measures, the industry's share in the auditor's portfolio. The findings suggest first, that the market share based measures may not be adequate proxies for industry expertise, and second, that future studies should consider alternative measures of specialization in studies of audit market outcomes