effects of multiple clients on the reliability of audit reports（多个客户端对审计报告的可靠性的影响）.pdf

Effects of Multiple Clients on the Reliability of Audit Reports Anne Beyer and Sri S. Sridhar1 October 11, 2005 1 Kellogg School of Management, Northwestern University, Evanston, IL 60208. We are grateful to Sunil Dutta, Ronald A. Dye, Yuhchang Hwang, Ramanan Natarajan, seminar participants at Arizona State University, the University of California at Berkeley, Columbia University, and Northwestern University, and to an anonymous referee for several useful com- ments and to the Accounting Research Center at Kellogg School of Management, Northwestern University, Evanston, IL 60208 for its generous financial support. 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 increased likelihood of audit failures. 1 Introduction Though there is considerable analytical literature on auditing, virtually the entire lit- erature, to the best of our knowledge, focuses on an auditor servicing only one client at a time. However, casual empiricism suggests that most auditors service multiple clients. Auditing multiple clients at the same time may affect the reliab