The Impact of PCAOB AS5 and the Economic Recession on Client Portfolio Characteristics of the Big 4 Audit Firms
Posted: 29 Jul 2013 Last revised: 5 Jun 2015
Date Written: November 1, 2013
We examine the impact of PCAOB Auditing Standard No. 5 (“AS5”) and the economic recession on risk characteristics and degree of auditor/client misalignment in the publicly-traded client portfolios of Big 4 firms. AS5 and the economic recession both likely resulted in an increase in audit firm personnel capacity as well as a decline in current and future revenue prospects, leading to concerns that the Big 4 firms may pursue clients that present greater risk to the portfolio. We find that the overall portfolio in 2009 presents greater financial risk, attributable to the impact of the recession on continuing clients. A net decrease in audit and auditor business risks is also attributable to continuing clients over this period as increases for new clients are offset by reductions due to departing clients. Overall, the results, which should be of interest to regulators, indicate that Big 4 firms continued to balance their portfolio with risk in mind.
Keywords: PCAOB Auditing Standard No. 5, economic recession, Sarbanes-Oxley Act, auditor portfolio, audit risk
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