Organizational risk in large audit firms

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.

The study is conducted as a review of literature on audit‐firm organization, risk management, professions and organization theory.

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.

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.

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.

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.