Industry Linkages and Audit Firms' Industry Portfolio Choice: Evidence from Product Language

Audit firms are organized along industry lines and industry specialization is a prominent feature of the audit market. Yet, we know little about how audit firms make their industry portfolio decisions, i.e., how audit firms decide which set of industries to specialize in. In this study, I examine how the linkages between industries in the product space affect audit firms’ industry portfolio choice. Using text-based product space measures to capture these industry linkages, I find that both Big 4 and small audit firms tend to specialize in industry-pairs that 1) are close to each other in the product space (i.e., have more similar product language) and 2) have a greater number of “between-industries” in the product space (i.e., have a greater number of industries with product language that is similar to both industries in the pair). Consistent with the basic tradeoff between specialization and coordination, these results suggest that specializing in industries that have more similar product language and more linkages to other industries in the product space allow audit firms greater flexibility to transfer industry-specific expertise across industries as well as greater mobility in the product space, hence enhancing its competitive advantage. Additional analysis using the collapse of Arthur Andersen as an exogenous supply shock in the audit market finds consistent results. Taken together, the findings suggest that industry linkages in the product space play an important role in shaping the audit market structure.

Mechanistic-based Design-Integrated Reliability Validation Framework for Mechanical Systems

Abstract: New product design challenges, related to customer needs, product usage and environments, face companies when they expand their product offerings to new markets; Some of the main challenges are: the lack of quantifiable information, product experience and field data. Designing reliable products under such challenges requires flexible reliability assessment processes that can capture the variables and parameters affecting the product overall reliability and allow different design scenarios to be assessed. These challenges also suggest a mechanistic (Physics of Failure-PoF) reliability approach would be a suitable framework to be used for reliability assessment. Mechanistic Reliability recognizes the primary factors affecting design reliability. This research views the designed entity as a “system of components required to deliver specific operations”; it addresses the above mentioned challenges by; Firstly: developing a design synthesis that allows a descriptive operations/ system components relationships to be realized; Secondly: developing component’s mathematical damage models that evaluate components Time to Failure (TTF) distributions given: 1) the descriptive design model, 2) customer usage knowledge and 3) design material properties; Lastly: developing a procedure that integrates components’ damage models to assess the mechanical system’s reliability over time. Analytical and numerical simulation models were developed to capture the relationships between operations and components, the mathematical damage models and the assessment of system’s reliability. The process was able to affect the design form during the conceptual design phase by providing stress goals to meet component’s reliability target. The process was able to numerically assess the reliability of a system based on component’s mechanistic TTF distributions, besides affecting the design of the component during the design embodiment phase. The process was used to assess the reliability of an internal combustion engine manifold during design phase; results were compared to reliability field data and found to produce conservative reliability results. The research focused on mechanical systems, affected by independent mechanical failure mechanisms that are influenced by the design process. Assembly and manufacturing stresses and defects’ influences are not a focus of this research.