Audit industry structure: How a client's need for privacy and industry expertise affects auditor alignment

Competing needs for industry expertise versus privacy have opposing effects on client-auditor alignments. A privacy preference motivates a client to select an auditor that differs from its competitors to avoid disclosure of proprietary information to their competitors; whereas, an industry expertise preference motivates a client to select an auditor that also serve its competitors due to the industry experience and lower costs. In this study, I develop a method using auditor alignments to examine the effect of a client's potentially conflicting needs for privacy and industry expertise on auditor concentration. My method assumes that auditors and clients align randomly. It then considers whether the observed distribution differs from a random assignment in a way that supports the privacy or expertise motive.; Restricting the analysis to the four clients with the largest total assets audited by the Big 4 in each industry, I examine the five possible auditor combinations ranging from an auditor alignment where all four clients share the same auditor to one where all four clients have different auditors. Using 213 three-digit Standard Industrial Classification code industries from the 2002 Compustat sample of publicly traded corporations, I find no statistically significant difference between the observed auditor alignment distribution and a random distribution.; I refine the analysis by examining whether the auditor alignment distribution is affected by the client industry structure. I find that clients in a dominant firm structure prefer privacy since the distribution skews towards all four clients having different auditors; whereas clients in a competitive market structure prefer expertise since the distribution skews toward all four clients sharing the same auditor. I also find that the auditor-client alignments in a dominant firm industry structure differ significantly from those in a tight oligopoly and competitive market industry structure.