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The purpose of this paper is to identify key questions that should be addressed to enable the Financial Action Task Force (FATF) to provide guidance regarding the alignment of anti‐money laundering, combating of financing of terror and financial inclusion objectives.

The paper draws on relevant research and documents of the FATF to identify questions that are relevant to consider when it formulates guidance regarding the alignment between financial integrity and financial inclusion objectives.

The FATF advises that its risk‐based approach enables countries and institutions to further financial inclusion. It is, however, not clear what the FATF means when its uses the terms “risk” and “low risk”. It is also unclear whether current proposals for financial inclusion regulatory models will necessarily limit money laundering as well as terror financing risks to levels that can be described as “low”. The FATF will need to clarify its own thinking regarding low money laundering and low terror financing risk before it will be able to provide clear guidance to national regulators and financial institutions.

This paper was drafted to inform current FATF discussions regarding guidance on financial inclusion. The questions are relevant to all stakeholders in financial regulation.

This paper aims to explore the application of the business risk audit (BRA) approach within non-Big-4 audit firms in the USA, the UK and Canada. This paper focuses on the motivation for adopting this approach for non-Big-4 audit firms in the three countries, and the advantages, disadvantages and aftermath of applying this method.

A combination of qualitative and quantitative methods to obtain the data necessary to address the research questions was used.

It is found that non-Big-4 audit firms in the three countries have adopted BRA; their motivation was primarily to follow the standards in each country, and the general trend in the industry. The advantages identified are consistent with previous research; a direct benefit was noted for audit effectiveness and risk management for both clients and auditors. One major disadvantage of applying BRA is the cost burden to both the audit firm and their clients. Some of the interviewees claimed that this method is better suited to large firms and large audits.

This is an innovative study that addresses a contemporary auditing issue. The majority of the audit research studies concentrate on the big audit firm practices; this study is the first to examine the application of audit practices within smaller audit firms.

The purpose of this paper is to investigate the effects of audit client importance on future bank risk and systemic risk in US-listed commercial banks.

The authors use archival research method.

The authors mainly find that client importance is negatively related with future bank-specific crash risk and distress risk, and also with sector-wide systemic crash risk and systemic distress risk in the future. The authors also report some evidence that these relations become more pronounced during the crisis period than during the non-crisis period. Moreover, the effect of client importance on systemic risk is found to strengthen in banks audited by Big-N auditors, by auditors without clients who restate earnings, and by auditors with more industry expertise.

These findings contribute to the auditing and systemic risk literature.

This study has implications for regulating the banking industry.

This study provides original evidence on how client importance affects bank-specific risk and systemic risk of the banking industry.

Although risks and client‐vendor relationships in IT outsourcing have been studied in prior research, there is a paucity of studies providing insights on the mitigation of client risks through the relationship. This research aims to focus on mitigation of the ex post risks of firms engaged in offshore software development (OSD). Client risks due to service provider behavior are identified first. Further, this work seeks to identify relationship variables that could reduce the impact of determinants of risk on a risk category.

This research followed a multiple case study method aiming to build insights and directions that would facilitate further research. The paper's goal of sampling was to choose cases which were likely to extend the emergent theory pertaining to risks and their mitigation through relationships.

Findings from this study show that shirking, loss of control over information assets, and service provider lock‐in are the three categories of ex post risks. A relationship management strategy ensuring reasonable profits to the vendor could mitigate shirking risk. Trustworthiness of vendors established through credibility and benevolence in prior engagements could mitigate the risk of loss of control over information assets. Further, dependence balancing through a multi‐vendor offshoring strategy and joint investments in relationship‐specific assets could mitigate the risk of service provider lock‐in.

The findings from this research provide useful insights in vendor selection and management process.

This paper adds to the growing body of literature in offshore IT outsourcing and makes two significant contributions: identification and categorization of risks due to vendor behavior and their determinants in OSD; and understanding the role of relationship dimension in mitigating such risks in OSD.

This paper presents an analytical framework for determining efficient levels and durations of precontractual investigation. Economic efficiency in the allocation of investigation tasks between client and tenderer is shown to depend on how closely related the technologies of investigation and construction are. Moreover, risk aversion and the interest rate affect the efficient allocation. The framework is also used as a basis for an investment analysis of the balance between client's investigation efforts and expected claims in the future. Finally, the framework is used to show how the optimal length of the investigation period can be derived from the expected cash flow associated with a project over its total life cycle, from inception to demolition. Results indicate the economic potential of tailoring risk sharing in construction procurement, according to the type of construction project and the attitudes to risk among client and contractors.

This chapter analyses the private financial sector's policy responses, lending practices and various forms of engagement with non-governmental organisations (NGOs), communities and institutional clients involved in controversial commodity industries. The chapter demonstrates that secrecy plays a constitutive role in this engagement. For investment banks, client-confidentiality is the ultimate limit to transparency. At the same time, NGOs campaign to make public and reveal links between investment banks and clients in commodity industries. The chapter also explores techniques within the financial sector for the assessment of social and environmental risk. The chapter argues that these techniques combine both practices of uncertainty and practices of risk. For civil society organisations, NGOs and local communities, these techniques remain problematic, and various campaigns question both the robustness of the financial sector's social risk screening methods as well as the sustainability of the investments themselves.

Section 404 of the Sarbanes–Oxley Act (SOX) altered the relationship between auditors and their clients by requiring an external audit of companies’ internal controls. Regulatory guidance is interpreted and applied by external auditors to comply with SOX. The purpose of this paper is to apply service operations management theories and techniques to the internal control audit process to better understand the role regulatory guidance plays in audit services. We discuss service operations management theories that apply to the production of audit services and employ the operations management technique of simulation to examine the effects of a historical relationship between the client and the auditor, information sharing between the client and the auditor, and the auditor’s perceived risk of the client on the internal control audit process. The application of service operations management theories and the simulation results illustrate that risk and information sharing are key factors for the audit process. The results suggest the updated Public Company Accounting Oversight Board guidance from Auditing Standard 2 to Auditing Standard 5 appropriately increased audit effectiveness by encouraging risk-based judgments and information sharing. This paper merges accounting and service operations management research to examine the effects of regulatory guidance on the internal control audit process. The paper uses simulation to illustrate the importance of interpreting regulatory guidance and the specific effects of risk and information sharing on the internal control audit process.

This rich descriptive study examines auditors' client risk assessment (i.e. “key audit matters”/critical audit matters) disclosures in expanded audit reports of 328 Financial Times Stock Exchange (FTSE) 350 companies. The study compares auditor-identified client risks with corporate risk disclosures identified in audit committee reports, in terms of number and type of risks. The research also compares variation in auditor-identified client risks between individual Big 4 audit firms. In addition, the study examines auditor ranking of their client risks disclosed.

The study manually content analyses disclosures in audit reports and audit committee reports of a sample of 328 FTSE-350 companies with 2015 year-ends.

Audit committees identify more risks than auditors (23% more risks). However, auditor-identified client risks and audit-committee-identified risks are similar (80% similar), as are auditor-identified client risks between the individual Big 4 audit firms. Only ten (3%) audit reports rank the importance of auditor-identified client risks.

Sample is restricted to one year, one jurisdiction, large-listed companies and companies audited by Big 4 auditors.

The study provides important insights for regulators, auditors and users of financial statements by identifying influences on disclosure of auditor-identified client risks.

The paper mobilises institutional theory to interpret the findings. The findings suggest that auditor-identified client risks in expanded audit reports may demonstrate mimetic behaviour in terms of similarity with audit-committee-identified risks and similarity between individual Big 4 audit firms. The study provides important insights for regulators, auditors and users of financial statements by identifying influences on disclosure of auditor-identified client risks.

The purpose of this paper is to examine whether client‐specific litigation risk affects the audit quality differentiation between Big N and non‐Big N auditors. Specifically, the authors examine whether higher quality audits of Big N auditors relative to non‐Big auditors is more pronounced for clients with high litigation risk than for clients with low litigation risk.

The authors develop the hypothesis based on auditors' potential monetary and reputational losses, collect the data of US listed companies from the Compustat and CRSP databases, and conduct regression analyses.

The authors find that the higher effectiveness of Big N auditors over non‐Big N auditors in constraining earning management is greater for high litigation risk clients than for low litigation risk clients, suggesting that clients' high litigation risk can force big auditors to perform more effectively.

This paper contributes to the literature by providing novel evidence on the effect of client‐specific litigation risk on the audit quality differentiation between Big N and non‐Big N auditors. The authors' findings complement the extant research on the relationship between the audit quality differentiation and country‐level litigation risk.

Product market competition may have various impacts on audit fees. On the one hand, according to the agency theory, product market competition can mitigate agency problems between management and shareholders. For clients with higher product market competition, auditors will lower the level of engagement risk assessment and reduce the required level of audit evidence, and hence audit fees will be lower. On the other hand, according to the audit risk model, product market competition will increase client business risk and audit engagement risk. Moreover, for clients with competition advantage, client business risk and audit engagement risk will be lower, and hence a lower audit fee. The paper aims to discuss this issue.

In this paper, the authors collect financial accounting data and audit fee data from CSMAR database. Our sample selection starts with all available observations on the Chinese listed companies during 2006–2011. Since there is a big difference in accounting practices between financial companies and other industries, the authors delete observations on financial companies. The authors further remove observations with missing data, yielding 6,709 observations for the final analysis. To define the industry, the authors use the first two digits of standard industry classification code set by China Securities Regulatory Commission. In order to reduce the effect of extreme observations, the authors also truncate the data at 1 and 99 percent. The authors use the Herfindahl–Hirschman index (HHI) and the natural logarithm of the number of listed companies within the industry to measure product market competition intensity. HHI is calculated as the sum of the squared percentage of revenues of the client firm among the total revenues of all public companies, i.e. HHI = ∑ i = 1 N ( s i / S ) 2 . N is the number of listed companies in the industry, S_i is the revenues for an individual firm and S is the total revenues of all public companies within the same industry. A higher HHI score indicates fewer companies dominate the industry and hence lower intensity of competition in the product market. The second measure of industry competition intensity is LNN, the natural logarithm of the total number of public companies in the same industry of a client firm. A larger value of LNN indicates a larger number of competitors in the industry, and a higher level of competition intensity. Following the literature (Kale and Loon, 2011), the authors use Lerner index (or price-cost margin (PCM)) to measure the listed company’s competitive advantage. It is actually a measure of a firm’s power to influence product prices in the industry. The authors adopt the Peress (2010) method to estimate Lerner index as net operating income, divided by sales, i.e. PCM=(Sales–COGS–Selling expenses–Administrative expenses)/Sales. A higher value of PCM indicates more product pricing power and a higher competitive advantage of a company. The authors also use Lerner index ranking (R_PCM) to measure the competitive advantage of a company in the industry. The authors sort PCM values in ascending order in each industry and divide into ten groups. Then, the authors assign a value from one to ten to each listed company within each group in each industry. A higher R_PCM value represents higher market power and higher competitive advantage of a company. Based on Simunic (1980) framework, the authors develop the following model to test the relationship between product market competition, competition advantage and audit fees: LNAF_it=β₀+β₁ PMC_it+β₂ SIZE_it+β₃ INV_it+β₄ REC_it+β₅ GROWTH_it+β₆ PRELOSS_it+β₇ LEV_it+β₈ QUICK_it+β₉ OPIN_it+β₁₀ IBIG4_it+β₁₁ DBIG10_it+β₁₂ SWITCH_it+β₁₃ LOCATE_it+β₁₄ STATE_it+∑β YearDummies+ε_it.

Using a sample of 6,709 firm-year observations from the Chinese stock market for the period of 2007–2011, the authors find that the product market competition intensity has a negative impact on audit fees, which means that agency cost effect is dominant in audit pricing at industry level. In addition, a company’s competitive advantage in the industry has a significant and negative impact on audit fees, which means that business risk effect also plays a critical role in audit pricing of individual engagement. The findings indicate that, in determining audit fees, auditors in the emerging market of China consider both the competition intensity of their clients’ product market at the industry level and the competitive advantage of the specific clients within the industry.

The findings indicate that, in determining audit fees, auditors in the emerging market of China consider both the competition intensity of their clients’ product market at the industry level and the competitive advantage of the specific clients within the industry.