Examining the Existential Threat of Audit Portfolio Risk to Big 4 Firms

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 1: Audit Risk I

Abstract

This paper analyzes cases where Big 4 firms incurred extreme financial losses from their audits of U.S. publicly traded clients. It employs the theoretical lens of portfolio management to determine if extreme loss occurrences primarily arise from client acceptance versus client continuance decisions. It also evaluates the client portfolio risk present when the respective Big 4 firm made these decisions. Results suggest: client continuance decisions are the greater source of extreme financial risk to the firms and current audit portfolio risk indicators are insensitive to the risks of these extreme loss occurrences. Additionally, these extreme losses are more prevalent within the smaller audit practices of the Big 4 firms.

Author

• R. Drew Sellers, Kent State University - Kent