How Does Industry Clustering Impact the Audit market?

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Abstract

The phenomenon of industry clustering has not been investigated in the audit literature. Industry clusters, which are a heavy concentration of companies from a single industry or group of interconnected industries, present a unique opportunity for an auditor to specialize in a particular industry. As a specialist in an industry cluster, an auditor could truly capitalize on their investments by capturing a larger share of this market and grasp additional economies of scale and industry expertise. Alternatively, with significantly higher levels of clients and potential audit fees, the level of competition from non-specialists in these industry-regions may be much higher than we see outside of industry clusters. In in this article, I investigate the impacts of industry clusters on the auditor market concentration and audit fees. The results show that auditor concentration is higher within the industry clusters, through a number of different specifications. It also appears that there is an additional fee premium received by auditors which operate within an industry cluster, above and beyond the impact of client bargaining power, office-size and level of auditor concentration. These results hold even through geographic market fixed effects.

Author

• Neal Andrew Vanden Berg, Temple University