Audit Firms' Client Acceptance Decisions: Does Partner-Level Industry Expertise Matter?

Abstract

SUMMARYThis study examines whether auditor industry expertise affects firms' client acceptance decisions. Analyzing listed firms in Taiwan, where audit partners' signatures are disclosed on the audit report, we find that partner-level industry specialists, rather than firm-level industry specialists, are less likely to accept clients with higher audit risk. We also provide weak evidence that partner-level industry specialists are less likely to accept clients with higher financial risk. This is consistent with the notion that partner-level industry specialists have an incentive to protect their reputation when making client acceptance decisions. In 2002, following the spirit of the Sarbanes-Oxley Act (SOX), the Securities and Futures Commission in Taiwan adopted a series of new rules to improve audit quality. We examine the effect of SOX on client acceptance decisions and the results indicate that partner-level industry specialists manage risk by accepting clients with less audit risk since litigation risk increased after SOX.