<p>  </p> <p>The implementation of ASC 606 significantly changed revenue recognition practices for many firms in the capital market by increasing the level of discretion required to record revenue amounts. I examine the impact of this increase in discretion on revenue manipulation around external targets. I find that firms near analyst revenue targets have increased levels of discretionary revenues under ASC 606 relative to their peers, indicating increased revenue manipulation. Further analysis reveals that these increased levels of discretionary revenues are concentrated in firms characterized as having increased opportunity or incentive to use ASC 606 opportunistically to manipulate revenues upwards. Specifically, firms with more complex revenue operations and firms in earlier life cycles are associated with increased discretionary revenues under ASC 606. I also provide preliminary evidence of revenue manipulation varying systematically with industry characteristics. This paper is one of the first to provide evidence of capital market consequences stemming from ASC 606, while also highlighting the impact of firm characteristics on the choice to manage revenues.</p>

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.