Audit Partners’ Cumulative Industry Experience and Audit Quality

Prior research suggests that characteristics of audit partners are important drivers of audit quality. However, evidence on whether partner industry expertise improves audit quality is mixed. Using a large dataset of audit partners in India, we employ new partner-level measures of industry expertise – partner industry experience, measured as cumulative number or cumulative size of firm-years audited by the signing partner in a particular industry – and examine its effect on audit quality. Our analyses indicate that greater experience of an audit partner in an industry results in lower discretionary accruals, lower cost of debt, and higher earnings response coefficients for client firms. We further find that the positive impact of audit partner’s industry experience is more pronounced in homogenous industries, where knowledge is likely more transferable across clients. Conversely, industry experience results weaken after a change in accounting standards, suggesting that partners’ experiential knowledge undergoes a ‘reset’ when a new reporting regime comes into force. Our results hold despite controlling for several other proxies for audit firm and partner industry expertise or general experience. In sum, we find that audit partner industry expertise improves audit quality after accounting for partner’s cumulative, rather than single-year, experience