Client Portfolio Research Articles

Client restatement announcement, audit office human capital investment, and audit quality improvements

This paper examines audit offices’ human capital investment in response to client restatement announcements and the resulting effects on audit quality and audit office client base. We find that audit offices attempt to acquire human capital and talent by posting more audit-related job positions just after a client announces a restatement. The increase in job postings follows restatements with more negative announcement returns and restatements of annual financial statements, and is concentrated among more senior and experienced positions. Importantly, the increased job postings are not driven by replacement hiring due to individual auditor departures and reflect more auditors joining the office. These human capital investments reduce future client misstatements and losses in client portfolios, indicating improvements in actual and perceived audit quality. Audit offices are also more likely to replace audit managing partners and prevent the signing partners of the misstated financial statements from signing new audit reports after restatement announcements.

The Importance of Business Development Incentives to Audit Partners: Evidence from the Propensity to Issue Modified Opinions to Group-Affiliated Audit Clients

SUMMARY We analyze a unique incentive motivating audit partners to pursue new revenue streams from potential audit clients related to incumbent clients. In auditing clients belonging to business groups, a partner who issues a modified audit opinion (MAO) to a group-affiliated client risks losing not only that client but also the opportunity to extend their audit services to other member companies. We document that partners are less likely to render MAOs to group-affiliated clients when other group members are large relative to the partners’ client portfolio, and this relation intensifies when the incumbent group-affiliated clients themselves are economically less important. We also find that partners who issue MAOs to group-affiliated clients underperform in attracting new clients from the same business group. Further, investors perceive that audit quality is higher in these partners’ non-group-affiliated clients, reflecting that reputation protection forces discipline partners to resist the temptation to issue unwarranted clean opinions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42.

Climate risk disclosures and auditor expertise

Many jurisdictions are establishing requirements for corporations to disclose climate-related risks, and for those disclosures to be audited. One of the first jurisdictions to do so is Australia, where the Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board (AUASB) issued a Joint Bulletin in 2018 stating that both preparers and auditors should consider the impact of climate risks on the company's financials. Utilising the Australian setting, this paper introduces a new measure of audit partner expertise, namely expertise in climate-related issues, and examines whether it is associated with the client company's climate risk reporting. We define audit partner expertise in climate-related issues based on their client portfolio composition in terms of greenhouse gas emissions. We find that the likelihood and quality of climate risk disclosures is higher when the audit partner has climate risk expertise, and this finding is driven by clients in industries with material climate risks.

Individual Auditor Turnover and Audit Quality—Large Sample Evidence from U.S. Audit Offices

ABSTRACT We examine the relationship between audit quality and office-level auditor turnover. Using resumes of over 106,000 Big 4 auditors, we find that audit offices with higher turnover have a greater likelihood of client annual report restatements. This detrimental effect is more pronounced when the departing auditors are more experienced and when the office faces tighter human capital constraints and is primarily attributable to voluntary turnover. Further, such negative effect is borne mostly by complex clients and intangible-intensive clients but is weakened for clients with greater product similarity to the client portfolio of the audit office. Last, the impact of office-level turnover on audit quality persists after controlling for firm-level turnover. Our findings inform the current policy debate on whether and to what extent audit firms should disclose auditor turnover as a potential indicator of audit quality. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42.

The differential impact of distracted auditors in managing portfolio of financially distressed audit clients on audit quality: the role of professional skepticism

This study hypothesizes that distracted auditors affect audit quality. As a result of resources scarcity, auditors pay more attention to financially distressed audit clients rather than non-financially distressed audit clients at the same audit client portfolio which eventually leads to differences in audit quality. In this context, earnings restatement of audit clients is used as a distraction event of auditors. Distracted auditor is measured by the percentage of the audit fees of financially distressed audit clients to total audit fees and audit quality is proxied by total accruals. The data is obtained from firms listed on the US stock market over eleven years between 2010 and 2020. The results indicate that financially distressed audit clients of distracted auditors receive higher audit quality than non-financially distressed audit clients of the same audit client portfolio. Further analysis suggests that this difference in audit quality between financially distressed audit clients and non-financially distressed audit clients decreases with skeptical auditors. This study introduces a new comprehensive approach to measure professional skepticism using KAMs disclosure. The results are robust to different measurements of distracted auditors, audit quality and professional skepticism. Overall, the empirical analyses suggest that distracted auditors have a decreasing differential impact on audit quality by professional skepticism.

Management of the bank’s corporate client portfolio

Management of the bank’s corporate client portfolio

The Influence of Increased Financial Flexibility on Small Accounting Firms' Public Audit Client Portfolios: Evidence from the Paycheck Protection Program

SUMMARY In this study, we examine whether increased financial flexibility afforded by the Paycheck Protection Program (PPP) affects small accounting firms’ public audit client portfolio decisions. We find some evidence suggesting that accounting firms receiving PPP loans exhibit greater public audit client selectivity. Specifically, accounting firms receiving PPP loans exhibit an increased likelihood of auditor switching and engage new clients that exhibit less financial and auditor business risk but greater potential for profitability relative to departing clients. Relative to both departing and continuing clients, new clients of firms receiving PPP loans exhibit some evidence of lower audit risk. Collectively, the results provide some evidence to suggest that the increased financial flexibility afforded through the PPP loans provided smaller accounting firms an opportunity to selectively manage their public audit client portfolio. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42; M48.

Improving audit opinion prediction accuracy using metaheuristics-tuned XGBoost algorithm with interpretable results through SHAP value analysis

This study aims to create a machine learning model that can predict opinions in external audits and surpass the benchmark set in a prior study from the literature. This tool could reduce audit risk, which is a crucial task in external audits. Previous studies have shown that it is possible to create models that can predict the audit opinion a company will receive. In these studies, authors used statistics and machine learning models, and both non-financial (e.g. audit lag) and financial data (e.g. financial ratios, or absolute value items available from financial statements) to make predictions. In this study, the performance of the XGBoost model optimized by metaheuristics algorithms is examined and evaluated. This study compares the performance of six different metaheuristic algorithms used to tune the XGBoost model in two separate scenarios. The first scenario represents a realistic client portfolio, where a majority of the clients are known, while the second scenario simulates a new clients-only portfolio, a more difficult scenario where prior information such as audit lag is not available. The study uses a dataset of 12,690 observations of Serbian companies and their audit opinions from 2016 to 2019. The findings indicate an improvement over the benchmark due to a more optimized hyperparameter tuning process and the use of the iterative sine-cosine algorithm for the XGBoost model.

Audit partner facial traits, gender, and career outcomes

A long line of psychology research suggests that people develop underlying behavioral trait expectations based on facial characteristics, and that these appearance-based trait inferences can influence judgments and decisions. In this study, we examine the relation between audit partners' appearances and their career outcomes. Using independent ratings of audit partners’ facial traits, we find that partners whose appearance violates common gender stereotypes have less prestigious client portfolios. Specifically, we find a negative relation between appearing “competent” and the career outcomes of females and a negative relation between appearing “warm” and the career outcomes of males. Subsequent analyses suggest that these relations are concentrated among non-Big 4 audit partners. We further consider the relation between facial traits and career outcomes and find evidence that males (but not females) whose appearance violates gender stereotypes are less likely to work for Big 4 audit firms. Together, our findings provide insights into the relations between appearance, gender, and career outcomes for public company auditors in the United States.

Internet-Based Cognitive Behavioral Therapy and Virtual Reality Exposure Therapy for Social Anxiety Disorder: Protocol for a Randomized Controlled Trial in Hong Kong.

Social anxiety disorder (SAD), also known as social phobia, is one of the most common mental disorders worldwide. In Hong Kong, the prevalence of SAD is high, but its treatment rate is low. SAD has immense impact on academic or work performance, social life, career development, and quality of life. One of the most effective treatments for SAD is cognitive behavioral therapy (CBT), with internet-based CBT (iCBT) and virtual reality exposure therapy (VRET) showing promise in treating SAD. However, internet interventions are underdeveloped in Chinese communities including Hong Kong. This study aims to develop an iCBT program that includes VRET, called "Ease Anxiety in Social Event Online" (Ease Online), for Hong Kong adults with SAD in a randomized controlled trial. The 14-week Ease Online program is a guided self-help iCBT program with a blended mode of service delivery. The program comprises 9 web-based modules and 5 individual counseling sessions (including 2 VRET sessions) conducted remotely or face-to-face with a therapist to provide therapist support, as guided iCBT shows superior effects than unguided iCBT. Other program components include therapist feedback on assignments, internal messages, forums, client portfolios, web-based questionnaires, reminders, and web-based bookings. The program can be accessed either through a mobile app or program website through a PC with an internet connection. The participants are openly recruited and screened using a questionnaire and through an intake interview. Eligible participants are randomized by placing them into a web-based iCBT group, app-based iCBT group, or a waitlist control (WLC) group. Participants in the WLC group are assigned to the app-based program upon completion of the service of the 2 experimental groups. Measurements of social anxiety, depression and anxiety symptoms, psychological distress, automatic thoughts, and quality of life are administered at pretest, posttest, and 3- and 6-month follow-ups. Multivariate ANOVA with repeated measures will be performed to determine the intervention effectiveness on the continuous variables over time. Participant recruitment commenced in January 2021. As of February 2023, a total of 1811 individuals applied for the Ease Online program. In total, 401 intake interviews have been completed, and 329 eligible participants have joined the program, among whom 166 have completed the service. Data collection is still ongoing, which is expected to be completed in March 2024. This study is the first of its kind in combining iCBT and VRET for the treatment of SAD in Hong Kong. At a theoretical level, this study contributes to the development and evaluation of internet-based psychological interventions in Hong Kong. At a practical level, the Ease Online program may serve as an alternative service option for SAD clients in Hong Kong if proven effective. ClinicalTrials.gov NCT04995913; https://clinicaltrials.gov/study/NCT04995913. DERR1-10.2196/48437.

Supplier Networks at the Integrated Peripheries of the Automobile Industry: The Case of Keiretsu Suppliers in Thailand

AbstractThe formation of supplier networks at the integrated peripheries is a complex process and results from variegated strategies adopted by firms seeking to adapt to the specificities of each host state. This study aims to provide a preliminary explanation of these patterns by focusing on the case of tier 1 suppliers serving Japanese car manufacturers in Thailand. The empirical data, which capture supply relationships for five different car parts and components, were analysed using a network visualization method. Our initial findings provide insights into how the supply networks vary across car manufacturers and countries and suggest some of the conditions at the integrated peripheries which can enable suppliers to expand their client portfolio to gain scale. The paper also discusses how the integrated periphery framework intersects with the keiretsu networks of Japanese car manufacturers.

Relations Between Dimensions of Organizational Trust and Activities Strengthening the Value of Enterprises

Theoretical background: Contemporary enterprises functioning in conditions of international competition search for factors that help the growth of their value on the market. One of these may become trust as it is based on shaping the skills of interpersonal cooperation within employee groups and organizations with the aim of the realization of common interests. Purpose of the article: The aim of this paper is the identification of relations between organizational trust and activities that have an impact on the growth of value of enterprises on the market. Research methods: In our research, a singular survey method on an unweighted sample was applied with the aid of the following mixed techniques: CATI phone survey and CAWI Internet survey. The sampling frame was a database of 500 of the largest companies in Poland (according to the ranking of the portal of Rzeczpospolita newspaper). On the basis of the method of random selection, a research sample which consisted of 179 enterprises was built. Main findings: As a result of the research conducted, the factors of the growth in value of enterprises on the market were identified. The impact of the attributes of organizational trust on the growth of the value of the analysed enterprises was indicated, in which incidentally the most significant impact occurred in the case of trust between employees, while subsequently trust towards the organization and trust towards the department heads. The attributes of organizational trust significantly influence the enhancement of the resources of an enterprise, while also the implementation of new technologies, the emergence of new investments and the increased client portfolio. However, no significant impact was indicated in terms of the growth of R&D activities, nor an increase in the level of competitiveness of enterprises on the local market, nor an increased intensification of activities on the market. The research findings provide knowledge on the subject of the use of the attributes of organizational trust in terms of creating value on the market, which may help an organizational culture based on trust in enterprises.

The scale and scope of the client portfolio and audit quality at the individual auditor level: evidence from China

We examine the relation between the scale and scope of an individual auditor’s client portfolio and audit quality. Using a sample of auditor-years for the period of 2001–2016 from China, where the personal identities of signing auditors are publicly disclosed, we find that auditors with large client portfolio scale (measured by an auditor’s total audit fees from clients) provide higher quality audits (measured by discretionary accruals and the likelihood of issuing modified audit opinions). However, auditors with large client portfolio scope (measured by the number of industries where clients are located) provide lower quality audits. Further analyses indicate that auditors of higher ability and reputation tend to have larger client scales and wider client scopes. Overall, our results suggest that, at the individual auditor level, the scale of the client portfolio conveys the auditor’s ability, and given the scale, the industry and geographic scope of clients reflects the auditor’s workload.

Influencia de las percepciones y actitudes gerenciales en la oferta enoturística en empresas vitivinícolas

This article sets out to analyse the perceptions and attitudes of the managers of the wine and viticul‑ tural companies of the Guadalupe Valley (Mexico) regarding wine tourism activities, that has experienced steady growth in the northwest of the country wth the wine routes in Baja California. To this end, we used quantitative methods to construct and validate a measurement instrument to gauge levels of reliability based on three prem‑ ises: perceptions, attitudes and wine tourism activities. This was applied to a representative sample of 64 com‑ panies, using structural equations with partial least squares (PLS). As a result, it can be seen how managerial perceptions are competitively focused on perceived threats posed by new competitors and products, with attitudes centring on their client portfolio and employee productivity, and wine tourism activities of tastings and tours. Consequently, this research contributes to the scientific debate on the organisation and business management of the wine tourism sector, by highlighting the specific metrics of business competitiveness in SMEs.

Neuromarketing. A positioning strategy in educational institutions

The memory of consumers towards a brand, specific product, service etc. is one of the most important points, being neuromarketing a valuable tool of market research used to know the behavior of the brain in front of different stimuli presented to consumers in order to take advantage of this information and create advertising pieces that allow to awaken emotions, sensations and feelings pleasing to consumers. It is a fact that marketing must be accompanied by capabilities that allow formulating, making and evaluating correct decisions and strategies that contribute to achieving objectives and goals, these capabilities being the strategic, functional and operational of the market. (Hooley, Saunders and Piercy, 1998) Within the concept of consumer benefit, service concepts such as the service offer and the service delivery system are taken into account, being the objective of educational marketing to develop strategies that enable in its administration and development the capture of its customers while responding to legal obligations and educational requirements in society. Educational marketing is an internal process in an educational organization to generate profitable or beneficial relationships with customers in order to attract new customers, create superior value, retain and increase the client portfolio by giving them satisfaction, and to have attractive prospects, an educational institution must provide a solid image and an appropriate educational program, at a price that students and their families are willing and able to afford, in a reasonably attractive location. However, the most important finding is the user's perception of the service and their fidelity to continue in the educational institution that forms a knowledge profile.

How Trading Analytics and Data Science Can Improve Investment Outcomes

This article shows how advanced trading analytics can help asset managers deliver improved investment outcomes for client portfolios using both indexing and alpha-seeking strategies. For alpha-seeking managers, trading analytics help right-size trades by balancing alpha capture and transaction costs optimally. For indexing managers, these tools enable more-precise and lower-cost transactions, especially around index rebalancing. Advances in data science can help overcome traditional trading challenges in fixed-income markets, such as the lack of transparency and proliferation of distinct securities.

СПОЖИВАЦЬКА ЛОЯЛЬНІСТЬ ЯК МАРКЕР ЕФЕКТИВНОСТІ СТРАХОВОГО БІЗНЕСУ В УМОВАХ ДІДЖИТАЛІЗАЦІЇ СТРАХОВОГО РИНКУ

Introduction. The deep dissemination of information technologies into all spheres of social life, including economic life, was caused by fundamental changes in the marketing environment due to the introduction of the latest tools and approaches in the formation of relationships with customers. Insurance companies are no exception in this matter, and they consider, first of all, the use of digitization processes in most business processes as a driver of their development, in particular, when maintaining the client portfolio. By the way, the latter has always been in the center of attention of insurers, and not only in conditions of widespread digitalization of the company's business processes. The purpose. The purpose of the article is to research the development of digital insurance services and identify the set of business processes of an insurance company to ensure consumer loyalty in the conditions of digitalization of the insurance business. Results. The article examines the current level of Internet use and the latest communication channels and proves that the digitalization of the main sectors of the economy will lead to the transformation of the business model of the functioning of insurance companies. Differences between digital insurance services and traditional ones are systematized based on: time availability; service format; service provision environment; level of confidentiality; office interaction; operating costs. It is well-founded that digital insurance services and the growing individualization of customer preferences will form a loyal consumer. A set of business processes of the insurance company (sales and after-sales service; settlement of losses; marketing and marketing communications; data analysis; IT support; legal and organizational support) was formed within the framework of the consumer loyalty program in order to ensure the efficiency of the insurance business. The main directions of increasing consumer loyalty in the conditions of digitalization of the insurance market are proposed. Conclusions. So, the latest technological solutions and the modern world are mutually complementary components, therefore those insurers who actively implement innovative solutions to increase the efficiency of their activities and maximize income will have rapid and sustainable development. Continuous improvement is the life philosophy of any insurance company that seeks to function successfully in a risky environment. In this aspect, consumer loyalty in the conditions of insurance market digitalization is characterized by greater significance compared to the traditional format of the organization of the insurance business. At the same time, the loyalty of the existing client base is a powerful competitive advantage and a guarantee of the effectiveness of the insurance business.

Gender Salary Gap in the Auditing Profession: Trend and Explanations

This study documents the gender salary gap in the auditing profession and explains its development. Using Swedish administrative data from 2007 to 2015 for all Certified Public Accountants (CPAs), I find that the auditing profession’s overall gender salary gap has substantially narrowed during this period, and more female auditors have moved up to the top earnings group, reducing the wide salary gap at the top of the income distribution. Further analysis shows that the increase in female auditors’ client portfolio size accounts for approximately half of the decrease in the total salary gap. I also find evidence that the rise in female leadership in the Big Six firms is positively associated with the increase in female auditors’ client portfolio size. This effect is more pronounced in the middle and bottom half of firms’ hierarchy, suggesting that female representation at the top of a firm’s hierarchy has spillover benefits for lower-ranked female auditors. The implications of this study may help audit firms narrow their gender gaps and cope better with the overall talent challenges of the auditing industry.

How Do Auditors Respond to Clients’ Rollover Risk?

We examine whether and how auditors incorporate rollover risk in assessing a client’s risk. Rollover risk is the risk associated with long-term debt maturing in 1 year, which has to be refinanced or settled shortly. Debt has two counteracting effects on firms’ riskiness: increased liquidity risk and increased monitoring. The finance literature suggests that rollover risk is an apparent risk factor because it results in high liquidity risk but only a weak (or limited) monitoring benefit. Consistent with that literature, we show that auditors increase audit fees, exhibit a higher likelihood of issuing a going-concern opinion, and terminate relations with their clients more frequently as rollover risk increases. Our study is the first in the audit research literature to document that auditors factor rollover risk in their pricing, going concern, and client portfolio decisions.

Financial reporting consequences of natural disasters: Evidence from the impact of resource constraints at audit offices on non-affected clients

Disaster-affected clients demand significant additional effort from their audit office, and hence strain the audit office’s resources available to other non-disaster-affected clients. We consider audit offices with disaster-affected clients to be strained offices and find that, compared with clients audited by non-strained audit offices, non-disaster-affected clients audited by strained audit offices are more likely to have their financial statements restated. This result suggests the financial reporting quality of companies not directly exposed to disasters could also be negatively affected by the disasters, due to their auditors’ strained-resource issue. We further find such a negative effect is more pronounced when the degree of resource constraints is greater and when the audit office lacks client experience or industry expertise. We offer novel evidence of financial reporting consequences of natural disasters, focusing on the externality of disasters on companies not directly affected by disasters. The findings have important implications for regulators in making disaster-related policies, for auditors in managing their client portfolios, and for companies in making auditor choice decisions.