Audit implications of major customer diversity

This study introduces a novel measure, major customer diversity, to capture the heterogeneity in firms’ major customer bases, and examines its implications for audit practices. While engaging with heterogeneous major customers may help firms stabilize revenues and mitigate overstocking costs, we argue that such diversification increases auditors’ perceived business risk and the complexity of audit procedures. Our empirical findings indicate that major customer diversity is positively and significantly related to audit pricing, suggesting that auditors incorporate this dimension into their risk assessments and fee structures. Furthermore, we find that this effect is amplified when firms exhibit high dependence on major customers or operate with greater complexity. Additional analyses demonstrate that major customer diversity has broader implications for financial reporting outcomes, including shorter audit report lags, reduced discretionary accruals, a higher likelihood of financial restatements, and a decreased probability of receiving going-concern opinions. Moreover, firms with diversified major customers tend to hold less accounts receivables and finished goods and form greater investments in works-in-process and raw materials and customer-specific assets (e.g., property, plant, and equipment), indicating the leveling of liquidity and operational risks.