Partner-Level Cumulative Industry Expertise and Audit Quality

Abstract

We employ a novel framework to evaluate the audit quality implications of cumulative industry expertise that audit partners acquire from auditing public clients across their careers. Leveraging the historical data of audit partner engagements with public clients in China, we find that the development of cumulative industry expertise is explained by various experiences of the partners in their initial year of handling public clients, as well as the growth, homogeneity, and demand for specialized knowledge in an industry. Our main results reveal a positive and significant association between partner cumulative industry expertise and different proxies of audit quality. We also find that many partners deemed specialists based on the largest market shares in a given year do not possess a high level of cumulative industry expertise and are insignificantly associated with audit quality. Our findings highlight the importance of adopting a cumulative perspective to study partners’ industry expertise.