The Association between Partnership Financial Integration and Risky Audit Client Portfolios

Posted: 12 Aug 2008 Last revised: 11 Nov 2009

See all articles by Travis Hui Qiu

Travis Hui Qiu

Ernst & Young China

David Hay

University of Auckland - Business School

Rachel F. Baskerville

Victoria University of Wellington - School of Accounting and Commercial Law

Date Written: February 27, 2007

Abstract

This study examines whether profit-sharing arrangements within accounting firms are associated with the riskiness of their client portfolios. Our results use unique data about the profit-sharing arrangements of the Big 8 firms during the period 1985 to 1994. We investigate whether there is a correlation between profit-sharing and risky clients. Firms consist of the financially integrated firms, i.e., those that share their profits across a large pool of partners across the country and the financially independent firms that share their profits in a small pool on a local office basis. The large-pool firms provide more incentive for partners to cooperate to audit high-risk clients than the small-pool firms. Our results show that the large-pool firms are associated with riskier client portfolios; this is indicated by a higher proportion of fees from clients that later suffer from bankruptcies. In contrast, a smaller proportion of the clients of the small-pool firms go bankrupt. Tests using financial distress as alternative measures of client risk confirm this result.

Keywords: client portfolio risk, profit-sharing, accounting, Big 8, Big 4, partnerships

JEL Classification: M50, M40

Suggested Citation

Qiu, Travis Hui and Hay, David and Baskerville, Rachel F., The Association between Partnership Financial Integration and Risky Audit Client Portfolios (February 27, 2007). Auditing: A Journal of Practice & Theory, Vol. 26, No. 2, 2007, Available at SSRN: https://ssrn.com/abstract=1213942

Travis Hui Qiu

Ernst & Young China ( email )

Shanghai 200031
China
86-21-2228 2941 (Phone)
86-21-22280407 (Fax)

David Hay (Contact Author)

University of Auckland - Business School ( email )

12 Grafton Rd
Auckland, 1010
New Zealand

Rachel F. Baskerville

Victoria University of Wellington - School of Accounting and Commercial Law ( email )

Faculty of Commerce and Administration
PO Box 600
Wellington
New Zealand
006444636951 (Phone)
006444635076 (Fax)

HOME PAGE: http://www.victoria.ac.nz/sacl/staff/rachel-baskerville.aspx

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