Client-acceptance decisions: Simultaneous effects of client business risk,audit risk, auditor business risk, and risk adaptation

Little is known about how audit partners make the client-acceptance decisio n. In this paper, a model is developed and tested that characterizes the cl ient-acceptance decision as a process of risk evaluation and risk adaptatio n. The model proposes that auditors will evaluate client-related risks (e.g ., financial viability, and internal control) and use that evaluation to de termine if the audit firm will suffer a loss on the engagement via a lack o f engagement profitability or future litigation. The model proposes that au ditors will adapt to the client-acceptance risks by using three strategies: (1) screening clients based on their risk characteristics; (2) screening c lients based on the audit firm's risk of loss on the engagement; and (3) mo re preactively adapting using strategies including adjusting the audit fee, making plans about necessary audit evidence, making plans about personnel assignment, and/or adjusting the amount of data collected during the client -acceptance process. To test the model, an experiment was conducted using 137 highly experienced audit partners as participants. The results show that the partners conside red the relationships between client-related risks and used their evaluatio n of those risks to evaluate the audit firm's risk of loss on the engagemen t. In terms of risk adaptation, partners screened clients based on the clie nts' risk characteristics and based on the audit firm's risk of loss on the engagement. Contrary to prediction, the partners did not use more proactiv e risk-adaptation strategies (e.g., adjusting the audit fee, making plans a bout necessary audit evidence, etc.) to make less "acceptable" clients more acceptable. It appears that avoiding risk, rather than proactively adaptin g to risk, is descriptive of how audit partners currently make the client-a cceptance decision.