Large and New Clients in Auditors’ Client Portfolios and Earnings Quality

Audit partner busyness research predicts that client portfolio size affects audit partner busyness and, as a result, audit quality. We argue that not only portfolio size, but also the client characteristics composing the portfolio have a role in this context. As auditing large and new clients requires more time and effort than auditing smaller and familiar clients, we predict that an audit partner with great proportions of large and new clients is too busy to ensure high earnings quality for every client. Furthermore, as audit partners have greater incentive to focus on large clients, we expect the negative association between earnings quality and the proportions of large and new clients to be less prominent among large clients. By employing a unique sample of the complete client portfolios of Big 4 and non-Big 4 audit partners, we find evidence suggesting that auditing greater proportions of large and new clients decreases audit partner’s ability to constrain earnings management. The negative effect on earnings quality is most prominent among the smaller clients of Big 4 auditors. Our results have important implications for regulators, practitioners, and investors by providing archival evidence that the earnings quality of an audit client is affected not only by the characteristics of the client and the audit partner, but also by the characteristics of the audit partner’s other clients