Risk Management in Client Acceptance Decisions

The Accounting Review, Vol. 78, No. 4, pp. 1003-1025, 2003

23 Pages Posted: 21 Sep 2006

See all articles by Karla M. Zehms

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems

Jean C. Bedard

Bentley University - Department of Accountancy

Abstract

This paper examines whether risk-management strategies (specifically, the use of specialist personnel and higher billing rates) moderate the effect of risk on client acceptance decisions, thereby assisting auditors in bringing prospective client relationships to acceptable risk/return levels. We propose a conceptual model of the client acceptance decision process, and use archival data on one firm's actual client acceptance decisions to test the model. Our results demonstrate the selective use of risk-management strategies in the client acceptance decision, based on the nature of the risks present for each particular client. Specifically, plans to charge a higher billing rate are associated with a reduction in the negative relationship between client acceptance likelihood and both going-concern risk and public trading status, and plans to assign specialist personnel are associated with a reduction in the negative relationship between client acceptance likelihood and both fraud risk and error risk. Therefore, we provide evidence that while risky clients are less likely to be accepted overall, the application of particular risk-management strategies to particular risk increases the likelihood of accepting such clients.

Keywords: Audit planning, bid pricing, client acceptance, error risk, fraud risk, going-concern risk, risk management

Suggested Citation

Zehms, Karla M. and Bedard, Jean C., Risk Management in Client Acceptance Decisions. Available at SSRN: https://ssrn.com/abstract=931946

Karla M. Zehms (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)

Jean C. Bedard

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

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