The Effects of Client Operational Shocks on Audit Office Portfolio Outcomes

Ph.D. Candidate Amanda Acevedo of Accounting will be defending her dissertation titled, “The Effects of Client Operational Shocks on Audit Office Portfolio Outcomes” on 12/16/2024.

Many thanks to Amanda’s dissertation committee:

• Committee Chair: Barbara Grein, Associate Professor, Drexel University
• Committee Co-Chair: Hsihui Chang, Professor, Drexel University
• Committee Member: Anthony Curatola, Professor, Drexel University
• Committee Member: Curtis Hall, Associate Professor, Drexel University
• Committee Member: Tamara Lambert, Professor, Lehigh University

Abstract:

This study examines how significant operational shocks to client-firms affect audit office portfolio outcomes. I investigate changes in portfolio risk, auditor-client alignment, and audit quality when offices have a client with a significant operational shock. Specifically, I examine significant mergers and acquisitions (M&A) of client-firms. I examine how retaining the M&A client (creating capacity constraints) or losing the M&A client (creating capacity surplus) impacts audit portfolio outcomes across Big4 and non-Big4 offices. Using a staggered difference-in-differences design, I capture both immediate portfolio responses and subsequent adjustments up to four years post-M&A, providing insight into the timing and persistence of these effects. Findings suggest that when Big4 offices retain M&A clients, overall portfolio risk does not significantly change. In contrast, when Big4 offices lose M&A clients, audit risk decreases, and client alignment improves. When non-Big4 offices retain significant M&A clients, findings suggest decreased client alignment and lower audit quality. However, when non-Big4 offices experience M&A client departures, these offices accept higher risk clients but show immediate improvements in audit quality.

This study contributes to the literature by examining how routine but significant operational changes to clients create lasting impacts on office-level portfolio management. The findings reveal that operational shocks to individual clients create effects across the office portfolio, affecting audit quality for other clients. These findings help explain why audit quality may vary systematically across offices, even when controlling for client characteristics.