Client Demand and its Effect on Audit Quality: Is it More Than Just Auditor Choice?




Behrend, Matthew J.

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This study investigates the role of the client and client demand and its effect on audit quality. By exploring client demand contexts, I investigate the first research question: does client demand for audit quality effect audit quality beyond the choice of auditor. Since the audited financial statements are the joint product of negotiations between the client and its external auditor (Antle and Nalebluff 1991, Francis 2011), it is important to consider the role of the client and a client's demand for audit quality. Based on previous research, I identify three contexts in which companies demand more or less audit quality. In particular, I express the demand for audit quality as a function of the level of the client's (1) operational complexity, (2) managerial influence, and/or (3) future external financing needs. For my second research question, I expand the analysis to consider the potential asymmetry in the effect of client demand on audit quality. I posit that the effect of high quality auditors is dependent on the demand of the client for audit quality. When client demand is high, the client will work with the high quality auditor to produce the audited financials. However, the efforts and contribution required from the client will be reduced, given that the higher quality auditor will act, in part, as a substitute for the client's effort. When client demand is low, the client will be less cooperative or will actively work against the auditor and the audit process. In conclusion, this study extends the audit quality literature by examining the effects of client demand on audit quality and examining whether these effects are asymmetric in nature. By examining the effects of client demand for audit quality beyond the choice of auditor, I provide empirical evidence as to the importance of client demand and its inclusion in audit quality research.


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Audit Quality, Auditing, Client Demand