We gratefully acknowledge insights provided by personnel at the participating firm. We thank participants at the 2003 International Symposium on Audit Research and research workshop participants at the University of Wisconsin-Madison, the University of Alabama, Northeastern University, and Dublin City University. We also appreciate the comments of an anonymous reviewer.
Audit Firm Portfolio Management Decisions
Article first published online: 29 JUL 2004
Journal of Accounting Research
Volume 42, Issue 4, pages 659–690, September 2004
How to Cite
JOHNSTONE, K. M. and BEDARD, J. C. (2004), Audit Firm Portfolio Management Decisions. Journal of Accounting Research, 42: 659–690. doi: 10.1111/j.1475-679X.2004.00153.x
- Issue published online: 29 JUL 2004
- Article first published online: 29 JUL 2004
- 30 June 2003; accepted 7 April 2004
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.