Audit Partners' Cumulative Industry Experience and Audit Quality

ABSTRACT Prior research identifies several audit partner characteristics as 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 the cumulative size or number of client firm‐years audited by the signing partner in a particular industry over their career—and examine their effect on audit quality. Our analyses indicate that audit partners' cumulative industry experience is associated with lower discretionary accruals, lower cost of debt, and higher earnings response coefficients for client firms (i.e., higher audit quality). The positive association between audit partners' industry experience and audit quality is more pronounced in homogenous industries, where partners' knowledge is likely more transferable across their within‐industry clients. Conversely, the benefits of audit partners' industry experience weaken after a change in accounting and auditing regulations, suggesting that partners' experiential knowledge undergoes a “reset” when a new regulatory regime comes into force. Our study suggests that the disclosure of partner names, recently implemented in the United States, can be informative to capital markets. As one of the first studies to employ Indian data in auditing research, we believe that this setting may be fruitful for answering questions that are difficult to address in other settings.