How the acceptance of large and high risk audit clients for relatively high audit fees may threaten an audit firm's de facto and perceived independence?

Answer 1

The professional judgment of auditors may be compromised when their firm is overly

dependent on one or a few large clients. Auditors, even those at the lower levels of a CPA firm,

are likely cognizant of the economic impact that losing such a client would have on their firm

and possibly on their own professional careers. This awareness alone may cause auditors to be

more "flexible" during such engagements. This problem may be compounded when a large

client poses a relatively high audit risk since there is a greater likelihood that problematic issues

requiring the exercise of professional judgment will arise on such an engagement.

Criticism of the auditing profession has sensitized investors, creditors, and other third-party

financial statement users to the paradoxical nature of audit independence. Third parties often

find it difficult to accept that auditors can maintain an objective, professional point of view when

the client retains and compensates the audit firm. This skepticism is likely heightened in

circumstances such as those that existed in the Phoenix audit market in 1985. In a highly

competitive audit market, the acceptance of a huge client, such as Lincoln, may cause third

parties to assume that the given audit firm will resolve key accounting and auditing issues in the

client's favor to ensure retention of the client.