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MAJ
22,6 Organizational risk in large
audit firms
Kim K. Jeppesen
590 Department of Accounting and Auditing, Copenhagen Business School,
Frederiksberg, Denmark
Abstract
Purpose – The main purpose of the paper is to analyze and discuss organizational risk in large-audit
firms. A secondary purpose is to contribute to auditing theory on how organizational risk may be
analyzed.
Design/methodology/approach – The study is conducted as a review of literature on audit-firm
organization, risk management, professions and organization theory.
Findings – Large-audit firms are commonly organized as partnerships relying on hierarchy and
standardization of work processes to control work. The paper argues that this may be an effective way
of organizing audit work in a stable environment. In a volatile environment, however, the strategy
becomes highly risky.
Research limitations/implications – The focus of the paper is on the organization of large-audit
firms and its findings do, therefore, not necessarily apply to small audit firms. The paper presents a
general view of the way large-audit firms are organized and controlled. Local variations may occur but
these are not analyzed in the paper.
Practical implications – The paper analyzes the inherent organizational risk of the common way of
organizing audit work and is therefore of direct interest to partners and other professionals in
large-audit firms. It may also be seen as an example of how organizational-risk analysis can be applied
in the audit process and it discusses the competences needed to perform such analysis. In this respect,
the paper is also of interest to practicing auditors as well as teachers and students of auditing.
Originality/value – Most of the literature on the organization of large-audit firms is relatively old
and this paper seeks to update and critically reinterpret knowledge in the area. It also contributes to an
understanding on how to apply organizational-risk analysis in the audit process.
Keywords Risk analysis, Risk management, Auditing
Paper type Literature review
Notes
1. In some sense, the “managerial professional bureaucracy” is a contradiction in terms, since
professional bureaucracies are generally not easily manageable according to Mintzberg
(1983).
2. Of the Big Four in Denmark, only KPMG remains a formal partnership. PWC, Deloitte and
Ernst & Young have now incorporated but still refer to their leadership as partners.
3. Typically around 8 percent of the professionals are partners. To take a few examples from
2005 annual reports: PWC has 8,019 partners and a client service staff of 94,877. KPMG has
6,667 partners and a client service staff of 76,073.
4. Andersen, for instance, MBTI-tested their employees as part of the effort to get a
homogeneous internal culture. They also taught auditors to identify the personality types of
clients to facilitate interaction (Squires et al., 2003, pp. 50-51).
5. From the bottom up, the KPMG hierarchy in Denmark is: Junior assistant, Assistant,
Assistant Manager, Manager, Senior Manager, Partner, Managing Partner and Senior
Partner. The equivalent PWC hierarchy is: Junior 1-2, Associate 1-2, Senior Associate 1-4,
Manager 1-4, Senior Manager, National Partner (salaried), Equity Partner and International
Partner. See also Table 2 in Post (1996).
6. Ernst & Young’s Audit Innovation project is a typical example of how audit innovation
takes place in large-audit firms. Ernst & Young’s International Council formed the Future
Vision Task Force in October 1992 and a steering committee comprised of partners from Organizational
seven countries was appointed to oversee the project. The Vision Task Force analysed
practices on over 100 engagements in 10 countries identifying problems and potential risk in large
improvements. It reported in 1994 and on the basis of this vision the new audit approach was audit firms
centrally developed by in Ohio, Cleveland between 1994 and 1997. In 1997, the worldwide
implementation process was initiated and it was generally considered completed by the turn
of the century.
601
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Corresponding author
Kim K. Jeppesen can be contacted at: kkj.acc@cbs.dk