Strategic management theory suggests that diversification should have a positive impact on performance due to economies of scope and scale, market power effects, risk reduction effects, and learning effects (Geringer et al. 2000). If the diversification has a narrow focus and is across connected constituencies, it can have a positive effect on performance since different market and product areas can leverage the knowledge gained in the crossover (Rumelt 1974). However, if the diversification is too wide, it can have a negative impact on performance due to a lack of economies of scope in developing competencies (Palepu 1985). Audit firm diversification can take many forms. An audit firm can diversify horizontally by adding clients from new industries or from new geographic locations. An audit firm can also diversify vertically by providing more services (i.e., tax compliance and planning, internal control review, or acquisition-related consultancy) to existing clients or by auditing a wide variety of clients within one industry. In this study, we focus on understanding the consequences of diversification in client industry membership on an audit firm’s performance. When an audit firm chooses to diversify its client industry membership, there could be two possible possibilities. On one hand, the audit firm can choose an industry closely related to its specialty area. For example, an audit firm specialized in the auto industry adds a news client from the auto supply industry. In such a narrow diversification, auditors can benefit from the knowledge spillover from their specialization area, thus enhancing the likelihood of detecting material misstatements and lowering risk of an audit failure. On the other hand, an audit firm can enter a new area unrelated to its industry specialization. For example, an audit firm specialized in the auto industry adds a client from the oil and gas industry. This is a wide diversification which would improve the audit firm’s growth and profitability, but also bring more exposure to risk and uncertainty in audit quality due to lack of specialized knowledge. Using data from China, one of the largest and fastest growing emerging markets, we investigate whether the two distinct diversification strategies in clients’ industry membership (i.e. narrow vs. wide diversification) have different effects on audit quality. Based on the industry index compiled by the Chinese Security Regulatory Commission (CSRC), we partition clients of an audit firm into three groups: clients in its specialization area, clients in an industry closely related to the specialization area, and clients in an industry unrelated to the specialization area.