Effects of Multiple Clients on the Reliability of Audit Reports

Anne Beyer and Sri S. Sridhar

Journal of Accounting Research, 2006, vol. 44, issue 1, 29-51

Abstract: This paper demonstrates the existence of two different kinds of externalities induced by an auditor servicing multiple clients at the same time. First, we show that the capital market price for a client can increase in the number of qualified reports that his auditor issues to his other clients, thus producing a stock price externality. Second, when the audit firm has limited wealth, an additional client can actually decrease the audit quality and increase the average likelihood of audit failure relative to a single‐client setting because of reporting externalities. Our analysis also demonstrates how requiring a more effective audit oversight mechanism can actually produce unintended consequences such as an increased likelihood of audit failures.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:44:y:2006:i:1:p:29-51

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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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