Accepted by Dan Simunic. An earlier version of this paper was presented at the 2002 Contemporary Accounting Research Conference, generously supported by the CGA-Canada Research Foundation, the Canadian Institute of Chartered Accountants, CMA Canada — Ontario, the Certified General Accountants of Ontario, and the Institute of Chartered Accountants of Ontario. We thank Charlie Bame-Aldred, Sudipta Basu, Joe Comprix, Mark DeFond (the discussant), George Deltas, Rob Easley, Van Johnson, Roger Koenker, Jim McKeown, Linda Myers, Dave Ricchiute, Gordon Richardson (editor), Richard Sansing, Dan Simunic (associate editor), Cathy Shakespeare, Dave Ziebart, two anonymous reviewers, workshop participants at the University of Illinois at Urbana-Champaign and participants at the 2001 American Accounting Association Audit Meeting and the 2002 CAR Conference for helpful comments. The usual disclaimer applies.
The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market*
Article first published online: 15 JAN 2010
2004 Canadian Academic Accounting Association
Contemporary Accounting Research
Volume 21, Issue 4, pages 747–785, Winter 2004
How to Cite
CHOI, J.-H., DOOGAR, R. K. and GANGULY, A. R. (2004), The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market. Contemporary Accounting Research, 21: 747–785. doi: 10.1506/RCBG-RWXT-QAVF-JDDW
- Issue published online: 15 JAN 2010
- Article first published online: 15 JAN 2010
- Audit clienteles;
- Audit litigation reform;
- Client quality;
- Financial ratios
We investigate whether the financial riskiness of large U.S. audit firm clienteles varied with the changing audit litigation liability environment during the period 1975-99. Partitioning the period of study into four distinct periods (a benchmark period (1975-84), a period of increasing concerns about litigation liability (1985-89), a period of lobbying for reform (1990-94), and a post-relief period (1995-99)), we find some evidence of risk decreases during 1985-89, strong evidence of risk decreases during 1990-94, and strong evidence of risk increases during 1995-99. However, we also find that over the period of our study, a time during which Big 6 market shares grew appreciably, the proportion of litigious-industry clients in Big 6 client portfolios grew at about the same rate as the proportion of such clients in the population. Moreover, the Big 6 share of the financially riskiest clients in the economy did not grow as fast as the overall Big 6 market share. In sum, although our evidence is consistent with the hypothesis that the riskiness of Big 6 client portfolios responded to changes in the audit litigation liability environment, we find no systematic evidence of a "race to the bottom" or "bottom fishing" by these firms in a bid to increase their market shares.