Want to learn more about improving risk management at your firm? Explore the rest of our series, including deep dives on audit deficiencies and SQM audit requirements.
Too often, client-related decisions are made under deadline pressure or in response to inspection findings. A firm might rush the due diligence process to quickly onboard a client — but miss a critical conflict of interest in its haste. Or an auditor might address the most immediate inspection risks — but fail to adequately respond to misstatement risks. As a result, firms can face reputational damage, legal or regulatory consequences, and costly fines.
The savviest firms take a different approach — one that’s data-driven, nonreactive, and treats client acceptance and continuance as strategic levers that balance quality, profitability, and growth.
The multi-dimensional view of risk
When it comes to analyzing risk, firms should take a sophisticated portfolio approach that considers multiple dimensions:
- Client inherent risk: Industry volatility, leadership integrity, and litigation exposure all influence whether a client aligns with the firm’s risk tolerance. A rapidly scaling financial tech or crypto-adjacent business may offer growth potential — but they may also introduce too much risk.
- Engagement execution risk: Technical complexity, scope, and data availability shape how deliverable an engagement actually is. A multi-entity audit with inconsistent data may significantly increase the potential of inspection findings.
- Talent capacity and competency: Capacity constraints and reliance on specialized skills can lead to bottlenecks. A portfolio of complex engagements may appear profitable, but it could also stretch review teams beyond safe limits without the proper technology and processes in place.
Together, these inputs shape a firm’s overall risk appetite and guide smarter decisions about where to invest, prune, and grow.
Take, for instance, fee pressures. When partners negotiate fees individually, they often rely on isolated relationships and perceived market norms — potentially charging their clients below-market rates simply because “everyone else charges this much.” Without portfolio-level visibility, leadership can’t make informed decisions around engagement pricing.
Let’s say a firm accumulated 30 discounted engagements within three years, all of which were concentrated in manufacturing — work that demands more technical expertise but delivers an 18% lower margin than other sectors. Upon discovering this, the firm’s teams become demoralized from working harder for less reward, and three senior managers leave to work for competitors. Replacing them costs the firm $450,000, while the underpriced work continues to drain profitability. If leadership had full visibility into the firm’s portfolio, they could have prevented partners from underpricing so many manufacturing engagements.
Geographic overextension is another factor firms must consider. For example, a firm may find itself spending $380,000 annually on travel to serve 15 clients who collectively generate only $920,000 in fees — a 41% cost ratio compared to the firm average of 12%. Several engagements are barely profitable after travel expenses, and the firm’s multi-year contracts prevent it from easily exiting. The dispersed footprint also prevents knowledge-sharing and makes quality-control visits prohibitively expensive. Without full visibility, firm leadership will continue to make costly mistakes around the clients they onboard and the ways in which they serve them.
Firms should also strategically align staffing with actual engagement risk rather than client prestige. Although it’s tempting to assign the most senior professionals to high-profile clients — the assumption being that premier engagements deserve top talent — this approach often misallocates resources. High-profile clients are usually mature, established organizations with risk-averse profiles, making their engagements relatively straightforward. Instead, firms should deploy their most experienced partners where complexity and uncertainty are highest — a strategic allocation that requires comprehensive visibility across the entire engagement portfolio.
And, full visibility into engagement allocation enables leadership to accurately assess team capacity and strategically balance workloads. This prevents burnout and strengthens retention — safeguarding the institutional knowledge and expertise that take years to develop.
Ultimately, firms protect both reputation and profitability by evaluating risk holistically — across clients, engagements, and the teams delivering the work.
Why manual analysis falls short
Managing risk across hundreds of clients means juggling dozens of variables for each one. Yet many firms are still manually tracking data in spreadsheets and manually calculating risk scores — if they even have a risk-scoring process.
This approach is not only time-consuming; it’s prone to human error. Data inputs are inconsistent and inaccurate, while bias can creep into decision-making when manually scoring risk. For instance, a person might base their risk score on past financial behaviors, even though the economic landscape has undergone a major change. With so much unreliable information, risk strategy quickly turns into guesswork, putting your firm at a competitive disadvantage.
Data-driven portfolio intelligence
Strategic portfolio management depends on integrated data. Without full visibility, leaders risk inadvertently accepting clients who ultimately drain revenue and expose the firm to liability.
Consider this scenario: Over several months, a firm onboards multiple clients from the cannabis industry. Each client individually passes the conflicts checklist, raising no red flags. However, the firm now derives 23% of its revenue from a single high-risk industry — without the specialized resources to handle multiple complex audits simultaneously. When malpractice insurance premiums spike in response, the firm attempts to resign from some clients mid-year — only to face reputational damage and potential abandonment claims.
By connecting intake, conflicts, CRMs, and other systems, firms can view their entire existing and potential client base in real time. They can see concentration risks, model profitability by segment, and identify where talent or regulatory exposure might strain execution. Leaders gain the foresight to rebalance portfolios, avoid overexposure, and strengthen client selection criteria.
Portfolio strategy as differentiator
Strategic portfolio management helps firms safeguard audit quality while preserving revenue stability. It allows leadership to exit risky engagements proactively, pursue aligned opportunities, and showcase data-backed discipline to regulators and clients.