Regulators and small audit firms allege that audit firm size does not affect audit quality and
therefore should be irrelevant in the selection of an auditor. Contrary to this view, the current
paper argues that audit quality is not independent of audit firm size, even when auditors initially
possess identical technological capabilities. In particular, when incumbent auditors earn clientspecific
quasi-rents, auditors with a greater number of clients have 'more to lose' by failing to
report a discovered breach in a particular client's records. This collateral aspect increases the
audit quality supplied by larger audit firms. The implications for some recent recommendations
of the AICPA Special Committee on Small and Medium Sized Firms are developed.