Academic journal article Auditing: A Journal of Practice & Theory

Review Partners' Reactions to Contact Partner Risk Judgments of Prospective Clients

Academic journal article Auditing: A Journal of Practice & Theory

Review Partners' Reactions to Contact Partner Risk Judgments of Prospective Clients

Article excerpt


Large audit firms generally wish to promote growth in their practice, yet avoid being associated with "overly risky" clients that could trigger litigation and diminish their reputation (Asare et al. 1994). The culture and incentive structures of large audit accounting firms may encourage "contact" partners (1) to evaluate clients, especially new clients, as favorably as possible since a partner's ability to deliver new clients to the firm is linked to his/her career success in the short term, as observed by Bell et al. (1994). Alternatively, there do not appear to be explicit incentives for contact partners to screen out "overly risky" clients.

Large audit firms require a second partner to participate in the screening and acceptance process, especially of new clients (Asare et al. 1994). The second partner, typically referred to as a "review partner," represents a control mechanism intended to protect the firm from accepting overly risky clients. Presumably, the review partner's judgments will be more "objective" than the contact partner's since s/he will not benefit to the same extent as the contact partner from obtaining a new client and may be held accountable for not screening out high-risk clients (Ayers and Kaplan 1998). However, previous research has not considered the extent to which risk partners actually perform their monitoring function. Presumably, if the review partner is truly an effective monitor, then s/he would discount the influence of an "overly favorable" contact partner's risk assessment in forming his/her own conclusions. However, as discussed in the next section, several factors suggest that this may not occur.

The purpose of this study is to examine the extent to which the judgments and behavioral intentions of risk review partners are shaped by the engagement risk judgment they receive from a contact partner. Specifically, an experiment was conducted in which audit partners serving in the role of risk review partner responded to a hypothetical scenario. The scenario described a prospective client, was designed to possess moderate-to-moderately high engagement risk, and included the contact partner's engagement risk assessment of that client. In a between-subjects design, the case manipulated the contact partner's risk assessment of the scenario as either "much lower risk than a normal audit client" or "about the same risk as a normal audit client," while holding the engagement risk in the scenario constant. Based on the level of risk in the case, an inherited contact partner engagement risk assessment of "about the same" risk was more consistent with the actual client information than was an assessment of "much lower" risk. We refer to this second condition as "overly favorable."

We found no difference between the engagement risk assessments rendered by review partners who received an overly favorable contact partner risk assessment vs. those who received the more consistent assessment. The acceptance and fee judgments of review partners in the overly favorable condition were actually more conservative than were the corresponding judgments of their peers in the more consistent condition. Justification activity was also greater in the overly favorable group. These results, when taken together, indicate that review partners do not treat an overly favorable engagement risk assessment by a contact partner as an unbiased signal or judgment. The results of the study provide evidence suggesting that the second partner review process helps to overcome potential incentive problems associated with contact partners' screening of new clients.


Contact partners are encouraged to actively seek out new clients (Bell et al. 1994). Once a prospective client has been identified, the contact partner and his/her staff collect financial and nonfinancial evidence (e.g., management integrity) to support making acceptance and related decisions (e. …

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