Audit Partners' Individual Risk Preferences in Client Retention Decisions‪.‬

INTRODUCTION Prior research has shown auditors' decisions to accept clients are influenced by the auditors' perceptions of the client's business risk and the auditor's business risk (Johnstone 2000). These risks, in turn, are influenced by the perceived strengths and risks of various financial and nonfinancial information (Pratt and Stice 1994; Bell et al. 2002). Subsequent client portfolio decisions also are associated with auditor's business risk such as the client's business risk and likelihood of fraud ((Johnstone and Bedard 2003, 2004). Prior research has assumed auditors' client portfolio (i.e., acceptance and retention) decisions follow predictions of Expected Utility Theory, i.e., risk neutrality. However, Prospect Theory predicts individuals faced with a prospective loss will respond with risk seeking behavior. Prior research has not addressed the potential influence of auditors' individual risk aversion or risk seeking on business risk decisions when prospects for loss are salient.