In explicating the working hypothesis of image theory, Beach and Strom ( 1989, p. 2) borrowed this example from Peeters ( 1986):
Assume that there is a creature who lives solely on fungi; mushrooms are abundant and edible and toadstools may or may not be abundant but they are poisonous. The creature holds as its working hypothesis that every fungus is a mushroom. However, if the fungus has one or more attributes of a toadstool, that working hypothesis is quickly rejected. The reverse logic does not apply: a fungus that has many of the attributes of a toadstool must not be eaten even if it has one or more attributes of a mushroom. Hence the negative attributes of a particular fungus determine the decision about its edibility.
The analogy is certainly appropriate in the client-screening context. Auditing firms (the creature) depend on clients (the fungi) for their growth and profitability. Most clients present little risk (the mushrooms) to auditing firms and are acceptable. However, there are a few high-risk clients (the toadstools) who present substantial business risk to the auditing firm. For instance, a jury verdict of $338 million was awarded against Price Waterhouse in the audit of Miniscribe. Under these circumstances, the auditor's screening decision rule can be characterized as "hungry yet cautious." Positive evidence does not counterbalance the effect of negative evidence. Given that perfect discrimination of prospective clients is not possible, this screening strategy is safest because it favors false negative decisions (rejection of low-risk clients that have attributes of high risk clients) over false positive decisions (acceptance of high-risk clients that have attributes of low-risk clients).
There is no mystery about auditors' posture in the screening decision. In recent years, accounting firms have had to pay millions of dollars to settle claims alleging that their audits did not uncover financial problems. Accounting firms are routinely sued when they are involved in an initial public offering that goes sour. A position paper on legal reform, issued by the Big Six firms, indicated that there are about $30 billion in damage claims currently facing the profession as a whole. In the same paper, the firms indicated they are reducing the threat of litigation by avoiding what are considered high-risk auditing clients and even entire industries. High-risk categories include financial institutions, insurance companies, and real estate investment firms.
Although the screening strategy may be reasonable from the viewpoint of auditors, it presents a conundrum for prospective clients and indeed for the economic system as a whole. With respect to prospective clients, they may be forced to buy auditing services from accounting firms less used to assessing their industry. As such, they may not be getting the quality of