This study examines whether auditor industry expertise in private clients influences audit quality of public client engagements in the United States. Private companies are significant to the U.S. economy as well as audit firms. I hand-collect auditors' private client information and construct a national, city, and joint national/city specialist designation and document a 17.9 to 47.3 (12.9 to 25.8) percent decrease in a public client's likelihood to misstate their financial statements (net income earnings management) when an auditor is a private client industry specialist. I then construct and test a city specialist measure using both private and public client data and find that it is economically stronger and more robust than the public only measure commonly employed by audit researchers. This study provides evidence of the importance of private companies to an audit firm's industry expertise as well as to researchers' use of city specialist measure in audit studies. / Doctor of Philosophy / This study examines whether auditor industry expertise in private clients influences audit quality of public client engagements in the United States. Private companies are significant to the U.S. economy as well as audit firms. I hand-collect auditors' private client information and construct a national, city, and joint national/city specialist designation and find that audit quality is higher for the audit firm's public clients in the same industry. Next, I construct and test a city industry specialist measure using both private and public client data and find that it is economically stronger and more robust than the public only measure commonly employed by audit researchers. This study provides evidence of the importance of private companies to an audit firm's industry expertise as well as to researchers' use of city specialist measure in audit studies.

While the effect of auditor industry specialization is well documented in prior literature, it is unclear under what conditions or for which type of firms an auditor's industry expertise matters. I hypothesize that industry specialist auditors will provide higher quality audits in settings where the likelihood of revenue manipulation is greater. I use a firm's manipulation of revenues to measure audit quality because the revenue account is significant, requires in-depth industry specific knowledge, and is subject to frequent manipulation. The results suggest that the impact of industry specialists is concentrated among firms with complex revenue recognition standards, high growth, and low institutional monitoring. Overall, my findings highlight the importance for regulators, auditors, clients, and investors to consider the circumstances in which industry expertise improves the quality of an audit.