The Validity of Auditor Industry Specialization Measures

Abstract

SUMMARY In this research note, we examine the validity of the measures of auditor industry specialization in empirical archival audit research. Industry specialist auditors are auditors who have developed a specific expertise and are therefore able to provide high quality and more efficient services to their clients. Over the years, research scholars have developed a multiplicity of measures of industry specialization (ISP). We compare 30 ISP measures and find that the use of different ISP proxies results in inconsistent classifications of auditors as specialists. Using audit fee and earnings quality models, we further show that these inconsistencies have a significant effect on the inferences drawn from the models using ISP measures. We conclude that ISP measures exhibit a low degree of internal and external construct validity. This represents an important measurement challenge for researchers and casts some doubts on the robustness of prior empirical evidence found in auditor industry specialization research.