Customer-Base Concentration: Implications for Audit Pricing and Quality

51 Pages Posted: 23 May 2014 Last revised: 23 Jan 2018

See all articles by Gopal V. Krishnan

Gopal V. Krishnan

Bentley University

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Annika Yu Wang

University of Houston - Bauer College of Business

Date Written: January 12, 2018

Abstract

What are the implications of major customer dependency, i.e., the degree of a supplier firm’s dependency on its major customers, for external auditors? While the conventional view emphasizes the negatives of major customer dependency for client business risk, we find that suppliers with more concentrated customer bases spend less on audit fees. The negative association between audit fees and customer-base concentration holds after controlling for a wide array of client firm and auditor characteristics. The evidence is consistent with reduced audit effort due to efficiency gains in the audit process, especially when suppliers with more concentrated customer bases share the same auditors with their long-standing major customers. The audit fee discount we identify does not imply that audit quality declines with customer-base concentration. In fact, we find that suppliers with more concentrated customer bases are less likely to experience material restatements of previously audited financial statements, which implies a positive link between audit quality and major customer dependency. Overall, our study contributes to research in accounting and operations management on inter-organizational relationships by exploring the interplay of customer-base concentration with client business risk and audit complexity. Taking the external auditors’ perspective, our study provides new managerial insights on the costs and benefits of major customer relationships for supplier firms.

Keywords: customer-base concentration; audit fees; audit quality; accounting restatements

JEL Classification: M41

Suggested Citation

Krishnan, Gopal and Patatoukas, Panos N. and Wang, Annika Yu, Customer-Base Concentration: Implications for Audit Pricing and Quality (January 12, 2018). Journal of Management Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2440009 or http://dx.doi.org/10.2139/ssrn.2440009

Gopal Krishnan

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Panos N. Patatoukas (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://sites.google.com/site/panossom/

Annika Yu Wang

University of Houston - Bauer College of Business

Bauer College of Business
4750 Calhoun Road
Houston, TX 77204
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,032
rank
20,161
Abstract Views
4,908
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information