Audit Market Competition and Client Portfolio Risk

59 Pages Posted: 16 Jun 2020

See all articles by Daun Jang

Daun Jang

California State University, Sacramento, College of Business, Department of Accountancy

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Date Written: September 2019

Abstract

This study investigates whether audit market competition influences the risk profile of audit offices’ client portfolios and whether an audit office’s client risk profile affects the association between audit market competition and audit quality. Economic theory suggests that market competition can affect a company’s risk-taking, but there is limited evidence on how audit market competition affects audit offices’ client portfolio composition. Two streams of prior research have documented that auditors make portfolio management decisions based on risk avoidance, and that audit market competition affects audit quality, although the results are mixed. We suggest that audit market competition influences audit offices’ acceptance of risky clients by reducing the set of available acceptable clients. The increased riskiness of audit offices’ client portfolio, in turn, affects audit quality provided by the audit office. We find that audit market competition at both the MSA and MSA-industry levels increases the riskiness of audit offices’ client portfolios. Furthermore, results suggest that audit market competition through increases in the audit office’s client portfolio risk explains a significant amount of the total effect of audit market competition on audit quality. This study contributes to the prior literature examining how audit offices manage their client portfolio risk and how audit market competition affects that ability and ultimately affects audit quality.

Keywords: Audit market competition, risk-taking, audit offices, client portfolio, audit quality

JEL Classification: M40, M41, M42, M48

Suggested Citation

Jang, Daun and Omer, Thomas C., Audit Market Competition and Client Portfolio Risk (September 2019). Available at SSRN: https://ssrn.com/abstract=3606814 or http://dx.doi.org/10.2139/ssrn.3606814

Daun Jang (Contact Author)

California State University, Sacramento, College of Business, Department of Accountancy ( email )

6000 J Street
Sacramento, CA 95819-6082
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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