Audit Firm Portfolio Management Decisions

33 Pages Posted: 4 Oct 2006  

Karla M. Johnstone

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

Jean C. Bedard

Bentley University - Department of Accountancy

Abstract

We examine client acceptance and client continuance decisions of a large audit firm to provide empirical evidence on the extent and nature of risk avoidance that the firm uses to purposefully manage its client portfolio. Our results support several key new inferences regarding audit firm portfolio management decisions. First, the results show that this firm is shedding the riskier clients in its portfolio, consistent with the risk avoidance theory of audit firm portfolio management. Second, the results show that the firm's newly accepted clients are less risky than its continuing clients. Although results of both the client continuance and client acceptance decisions imply a less risky portfolio emerging over time, there are greater differences in risk between continuing and discontinued clients than between continuing and newly accepted clients. Third, we find that audit risk factors are more important in audit firm portfolio management decisions than are financial risk factors. Finally, we find no evidence that audit pricing affects the client acceptance and continuance decisions of this firm, controlling for risk and other client characteristics.

Suggested Citation

Johnstone, Karla M. and Bedard, Jean C., Audit Firm Portfolio Management Decisions. Journal of Accounting Research, Vol. 42, No. 4, pp. 1-32, September 2004. Available at SSRN: https://ssrn.com/abstract=934167

Karla M. Johnstone (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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