Can the Big Four Manage Client Portfolio Risk? Examining the Wreckage of Extreme Loss Occurrences

• In Event: Research Paper Session—Auditing

Abstract

This paper analyzes efforts by the large public accounting firms to reduce their legal liability though the use of client portfolio management. In order to do this, the paper studies the patterns formed by cases where Big Four firms incurred extreme financial losses from their audits of U.S. publicly traded clients. The results suggest that client continuance decisions, and not acceptance decisions, are the greater source of extreme financial risk to the firms. Furthermore, large clients tend to be the source of most extreme loss occurrences. With current audit portfolio management practices focused more on the scrutiny of new engagements and biased in favor of retaining large clients, the prospects for client portfolio management are dim. Current risk indicators employed in academic research are largely insensitive to the risk posed by these extreme loss occurrences, and therefore may not be properly specified.

Authors

• R. Drew Sellers, Kent State University - Kent

• Timothy J Fogarty, Case Western Reserve University

• Jadallah Azmi Jadallah, Kent State University - Kent