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    The Impact of PCAOB AS5 and the Economic Recession on Client...
    research summary posted September 16, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 01.06 Impact of PCAOB, 06.0 Risk and Risk Management, Including Fraud Risk 
    The Impact of PCAOB AS5 and the Economic Recession on Client Portfolio Characteristics of the Big 4 Audit Firms.
    Practical Implications:

    These findings should be of interest to regulators (e.g., ACAP and Department of Treasury) that have focused efforts on assessing the sustainability of the audit profession. However, the results can be viewed as good news in terms of the overall risk level of the Big 4 client portfolio, but possibly as bad news if regulators believe the Big 4 firms are the most qualified to provide audit services to riskier clients and should not use market forces as an excuse to shed or avoid these riskiest clients.


    Schroeder, J. H., and C. E. Hogan. 2013. The Impact of PCAOB AS5 and the Economic Recession on Client Portfolio Characteristics of the Big 4 Audit Firms. Auditing: A Journal of Practice & Theory 32 (4): 95-127.

    audit risk, auditor portfolio, economic recession, PCAOB Auditing Standard No. 5 (AS5), Sarbanes-Oxley Act
    Purpose of the Study:

    The accounting scandals of the early 2000s, and the resulting loss of investor confidence in the U.S. capital markets, led to significant changes in the U.S. audit market. These changes include a decrease in the number of large international audit firms from five to four with the demise of Andersen, an increase in regulatory scrutiny with the passage of the Sarbanes-Oxley Act of 2002 (SOX) and the establishment of the Public Company Accounting Oversight Board (PCAOB), as well as an increase in the demand for assurance services associated with SOX Section 404.

    The authors examine the impact of PCAOB Auditing Standard No. 5 (AS5) and the economic recession on risk characteristics and degree of auditor/client misalignment in the publicly traded client portfolios of Big 4 firms. AS5 and the economic recession both likely resulted in an increase in audit firm personnel capacity as well as a decline in current and future revenue prospects, leading to concerns that the Big 4 firms may pursue clients that present greater risk to the portfolio.

    Design/Method/ Approach:

    Using Audit Analytics and Compustat the authors compile a sample for 20,736 firm-year observations. The pre-AS5/recession period is from 2002 through November 14, 2007 and the post-AS5/recession period is from November 15, 2007 through 2009. 

    • During the post-AS5/economic recession period the authors continue to see a net loss of clients to the non-Big 4 level; however, at a lower rate than documented during the pre-AS5/recession period.
    • When comparing the overall Big 4 portfolio characteristics, the authors find that the public client portfolio in 2009 presents greater financial risk, but lower audit risk and auditor business risk relative to 2006 (last year of the pre-AS5 period).
    • The net increase in financial risk is attributable to the impact of the economic recession on continuing clients.
    • The net decrease in audit and auditor business risks is also attributable to clients that remain in the portfolio over this period, as post-AS5/recession increases in audit risk and auditor business risk for new clients is offset by reductions due to departing clients.
    • The overall portfolio has a lower percentage of misaligned” clients in 2009 relative to 2006.
    • The findings suggest the Big 4 firms have continued to balance their portfolios with risk in mind, and continue to reduce the percentage of misaligned clients, consistent with portfolio trends of Big 4 firms documented in earlier post-Enron/SOX studies.
    Risk & Risk Management - Including Fraud Risk, Standard Setting
    Impact of PCAOB, Impact of SOX