This study examines whether profit‐sharing arrangements within accounting firms are associated with the riskiness of their client portfolios. Our results use unique data about the profit‐sharing arrangements of the Big 8 firms during the period 1985 to 1994. We investigate whether there is a correlation between profit‐sharing and risky clients. Firms consist of the financially integrated firms, i.e., those that share their profits across a large pool of partners across the country and the financially independent firms that share their profits in a small pool on a local office basis. The large‐pool firms provide more incentive for partners to cooperate to audit high‐risk clients than the small‐pool firms. Our results show that the large‐pool firms are associated with riskier client portfolios; this is indicated by a higher proportion of fees from clients that later suffer from bankruptcies. In contrast, a smaller proportion of the clients of the small‐pool firms go bankrupt. Tests using financial distress as alternative measures of client risk confirm this result.
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1 November 2007
Research Article|
November 01 2007
The Association between Partnership Financial Integration and Risky Audit Client Portfolios
David C. Hay;
David C. Hay
aAssociate Professor at The University of Auckland, at Ernst & Young LLP.
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Rachel F. Baskerville;
Rachel F. Baskerville
bAssociate Professor at The University of Exeter, at Ernst & Young LLP.
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Travis Hui Qiu
Travis Hui Qiu
cSenior Manager at Ernst & Young LLP.
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Online ISSN: 1558-7991
Print ISSN: 0278-0380
American Accounting Association
2007
AUDITING: A Journal of Practice & Theory (2007) 26 (2): 57–68.
Citation
David C. Hay, Rachel F. Baskerville, Travis Hui Qiu; The Association between Partnership Financial Integration and Risky Audit Client Portfolios. AUDITING: A Journal of Practice & Theory 1 November 2007; 26 (2): 57–68. https://doi.org/10.2308/aud.2007.26.2.57
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