Academic journal article Journal of Comparative International Management

Toward a General Theory of Client Acceptance and Continuance Decisions

Academic journal article Journal of Comparative International Management

Toward a General Theory of Client Acceptance and Continuance Decisions

Article excerpt

1. Introduction

Since the fifties, auditing research has been constantly growing and evolving, using various theories and methodologies, and addressing ever more varied and complex issues (Krogstad and Smith, 2003). Within this diversity, auditor's judgment and decision making research (J&DM) remains one of the most important investigative areas within the field of auditing (Kotchetova and Salterio, 2007). This is not surprising given that auditor's work is rooted in the exercise of professional judgment to make diverse decisions (Trotman, 1996). This paper contributes to this research stream, discusses the theoretical perspectives used to study auditor's client acceptance and continuance decisions (CACD), and develops the foundation for a general CACD theory.

Client acceptance and continuance decisions are critical and complex decisions, which have significant economic implications for audit firms, their clients, and auditors (Johnstone and Bedard, 2004). For public companies or clients, auditors' CACD may have important consequences such as stock price increase following client acceptance or retention and stock price decline following the auditor's resignation (Beneish et al., 2005). On the supply side, CACD are considered by both professionals and academics as the most important decisions in audit practice (Gendron, 2001; Johnstone and Bedard, 2003). They are frequent and recurrent decisions, which automatically precede every audit engagement. In addition, CACD are critical to the advancement of the auditor's professional career as well as the composition of the audit firm's portfolio of clients and its profitability. This is all the more true that "once formed, the auditor-client relationship for public companies usually extends many years, as those companies rarely switch auditors" (Adams et al., 2005). On the technical side, CACD represent a critical phase in the audit process (IFAC, 2010). The CACD phase includes most of the financial statements audit (or external audit) steps but at a smaller scale. In addition, a careful and extensive assessment of the client during this pre-engagement stage contributes to a better planning and performance of the audit engagement, thereby reducing audit costs and errors.

Considering the theoretical and the practical importance of the CACD stage in the audit process, building a theory of CACD is essential and benefits auditing scholars and practitioners as well. It is also a critical step for developing a general theory of external auditing. In the extant academic literature, two different perspectives have been used to study CACD: the single-client perspective and the clients-portfolio perspective. Under the first perspective, which is by far the dominant approach in the auditing literature, the auditor considers the client-specific factors only when making a client acceptance decision (CAD) or a client continuance decision (CCD), and disregards the potential impact of his decision outcome on the audit firm portfolio of audit clients. The second approach, also called the audit firm portfolio management perspective, considers the set of the audit engagements relating the auditor and his different clients as a portfolio that the audit firm purposefully manages. Under this approach, each audit engagement between the auditor and the client is considered within a broader perspective where the CACD are closely interconnected and directly related to the overall performance of the audit firm.

In our view, these two approaches taken separately provide limited insights on the CACD and the external audit process. This study discusses the apparent incommensurability of the two perspectives to set the foundation for a general theory of the CACD. The rest of the paper is organized as follows: First, the client acceptance and continuance decisions are defined. Second, the single-client perspective as well as the "the auditor-client relationship life cycle" are introduced. …

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