Title: Auditor sanctions and the management of riskiness of audit client portfolios

Authors: Hsiao-Lun Lin; Ai-Ru Yen

Addresses: Department of Accountancy, National Taipei University, New Taipei City, Taiwan ' Department of Accounting, Business Law, and Finance, Northeastern Illinois University, 5500 N. St. Louis Ave., Chicago, IL, USA

Abstract: This study examines the effect of auditor sanctions imposed on the riskiness of auditors' client portfolios. We identify auditors/audit firms that were subject to disciplinary actions by the China Securities Regulatory Commission (CSRC) and empirically examine the change in the riskiness of their client portfolios after the sanctions were imposed. The empirical results suggest a decrease in the overall clientele financial risk, measured by both aggregate bankruptcy measures and individual financial risk measures, after enforcement releases were issued. Moreover, we find that the decrease in client portfolios' risk is greater when a disciplinary action is imposed in the period of higher legal liability than when it is imposed in the period of lower legal liability. This study contributes to prior studies on the effects of audit failure on auditors' behaviour by examining the association between auditor sanctions and the management of audit client portfolios risk.

Keywords: auditor sanction; legal liability; client risk; disciplinary action.

DOI: 10.1504/IJAAPE.2019.099141

International Journal of Accounting, Auditing and Performance Evaluation, 2019 Vol.15 No.2, pp.144 - 167

Received: 21 May 2018
Accepted: 26 Sep 2018

Published online: 03 Apr 2019 *

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