A report issued by the U.S. General Accounting Office (GAO) in 2003 identified industry specialization as a key driver of consolidation among audit firms and highlighted the extreme levels of auditor concentration in some industries. Like the GAO, we view auditor concentration as a measure of industry specialization, and we examine one feasible explanation for why auditor specialization differs across industries. We posit that the investment opportunity set (IOS) plays an important role in determining whether an industry is an attractive target for auditor specialization and in creating barriers to auditor entry. We argue that when industry-specific IOS is high, auditors will make costly industry-specific investments that allow them to offer a differentiated product and to create entry barriers for other audit firms. However, when a large component of IOS is specific to individual firms within an industry so that IOS is highly variable within the industry, the auditors' knowledge requirements are highly specific to those firms and it is more difficult to transfer knowledge and spread costs across clients in that industry. Using two different measures of IOS and three alternative industry classification schemes, we present evidence that auditor specialization is increasing in industry IOS levels and decreasing in within-industry IOS variability.