Audit Firm Office Size and Client Acceptance Decisions
Posted: 31 Jul 2012 Last revised: 28 Feb 2018
Date Written: February 26, 2018
This study examines whether audit firm office size affects auditors’ risk tolerance in making client acceptance decisions. Analyzing publicly traded client portfolios of the Big 4 audit firms from 2003 to 2012, we find that large Big 4 offices are less likely to accept clients with high audit risk. This is particularly true when auditors face temporary capacity constraints arising from the exogenous demand shock by SOX 404 during the post-SOX 404/pre-AS5 period (2003–2007). However, the negative association between office size and risk consideration in client acceptance decisions becomes weaker when AS5 coupled with the financial recession results in a temporary capacity surplus in the post-AS5/financial crisis period (2008–2012).
Keywords: Client acceptance decisions; Office size; Big 4 auditors; Exogenous capacity shock
JEL Classification: M42
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