Do Small Audit Clients “Pay the Price” for Audit Partner Busyness Caused by Acquisitions of Large and New Clients?

This study investigates the importance of client size and new clients for audit partner busyness. Because auditing large and new clients requires more time and effort than auditing smaller and familiar clients, we predict that an audit partner with considerable proportions of large and new clients will be too busy to ensure high earnings quality for all clients. Moreover, because audit partners have greater incentive to focus on large clients, we expect that busy partners will be more willing to compromise the earnings quality of smaller clients to maintain high earnings quality of large clients. Using 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 an audit partner’s constraint of earnings management. The negative effect on earnings quality is most prominent among smaller clients of Big 4 partners. These findings indicate that even when audit partner busyness is driven by acquisitions of large and new clients, the consequences of the busyness are more severe for smaller clients. Our results have important implications for regulators, practitioners, and investors because they provide 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.