Auditors' Litigation Risk PDF Download

Author: Kevin M. Raedy
Publisher:
ISBN:
Category :
Languages : en
Pages : 129

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Author: Cory A. Cassell
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Category :
Languages : en
Pages :

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We investigate whether auditors are sensitive to litigation risk related specifically to having greater numbers of institutional investors that hold the common stock of a given client. Our findings suggest that audit fees are higher when the number of institutional investors holding stock in the company is greater. Additional tests corroborate our inference that the association between audit fees and the number of institutional investors is related to litigation risk. The importance of improving our understanding of auditors' sensitivity to factors that increase litigation exposure is highlighted by the number and magnitude of lawsuits filed against auditors relating to the audits of public clients.

Author: Sue Woolley Scholz
Publisher:
ISBN:
Category : Accountants
Languages : en
Pages : 169

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Author: Jayanthi Krishnan
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Category :
Languages : en
Pages : 0

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Litigation against auditors has increased dramatically in recent years. Auditors can offset litigation risk in a number of ways, including improved audit quality and planning, increases in audit fees and increases in the issuance of modified opinions. Auditors can also adjust their client portfolios by becoming more selective in their choice of new clients and by withdrawing from high-risk engagements. We test the hypothesis that litigation risk motivates auditor resignations by comparing resignation companies with two groups of client companies that dismissed their auditors: one matched with the resignation companies on industry and year, and the other matched on year alone. We find resignation companies differ from dismissal companies along dimensions that capture the probability of litigation: financial distress, variance of abnormal returns, auditor independence, tenure and a modified (particularly going-concern) opinion. We also construct a litigation proxy based on a prior litigation-prediction model and find that the proxy is positively associated with the probability that the auditor will resign rather than be dismissed from the engagement. Our analysis is consistent with concerns expressed by the accounting profession that litigation pressures lead to the withdrawal of audit services for a segment of the market.

Author: Lynn Barkess
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Category : Auditors
Languages : en
Pages : 32

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Author: Mahfuz Chy
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Category :
Languages : en
Pages : 63

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We exploit staggered state-level shocks to third-party auditor legal liability in the U.S. to test whether auditor litigation risk affects client companies' access to private debt markets. We find that an exogenous increase in auditor litigation risk leads to an increase in both clients' likelihood of receiving bank loans and the average amount of the bank loans that clients receive. In support of our proposed mechanism that auditor litigation risk leads to improvements in clients' audit and financial reporting quality, we find that these same shocks lead to a reduction in accruals, an increase in going-concern opinions, a decrease in restatements, and an improvement in accruals' ability to predict future cash flows. We also find that increased auditor litigation risk leads to an increase in the contractibility of clients' accounting numbers, as proxied by the use of debt covenants, and a decrease in the cost of borrowing.

Author: Miguel Minutti-Meza
Publisher:
ISBN:
Category :
Languages : en
Pages : 22

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A large body of research has studied audit fees aiming to determine whether they reflect auditors' response to clients' risks, auditors' expertise, competitive pressures in the audit market, and independence issues between auditors and clients. Badertscher, Jorgensen, Katz, and Kinney [2014] study the effect of auditor litigation risk on audit fees. Litigation risk is expected to be a strong incentive for auditors to deliver high quality audits and an important determinant of audit fees. Nevertheless, determining the impact of litigation risk is complicated because although there is considerable variation in audit fees, there are scarce opportunities to examine variation in litigation risk. This paper provides a brief summary of extant studies examining the effect of auditor litigation on audit fees, and discusses research design issues and future research opportunities in this area.

Author: Szu-fan Chen
Publisher:
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Category :
Languages : en
Pages : 49

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In contrast to research showing that private litigation discourages audit clients from disclosing internal control weaknesses, we find that auditors' litigation concerns have a countervailing effect. Our empirical results show that adverse internal control opinions reduces the likelihood of auditors being implicated in lawsuits against their clients, which suggests that disclosing internal control weaknesses can protect auditors from litigation. Consistent with the notion that such litigation protection in turn encourages auditors to issue adverse internal control opinions, we find that both new and incumbent auditors are more likely to issue adverse internal control opinions for clients with higher ex ante litigation risk. Moreover, for restating firms that eventually acknowledge the existence of internal control weaknesses, ex ante litigation risk is positively associated with earlier adverse internal control opinions. Overall, our evidence suggests that litigation threat provides an incentive rather than a disincentive for auditors to issue adverse internal control opinions in a timely fashion. As both new and incumbent auditors have such incentives, auditors' litigation concerns suppress clients' opportunistic internal control opinion shopping.

Author: Dong Young Lee
Publisher:
ISBN:
Category : Accountants
Languages : en
Pages : 110

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Author: Sebahattin Demirkan
Publisher:
ISBN:
Category :
Languages : en
Pages : 33

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This study extends the Palmrose and Scholz (2004) general litigation and general restatements study by focusing on auditor litigation and revenue restatements. We investigate all potential accounting issues, individually, instead of by their group method, with regard to auditor litigation. The impact of the individual accounting issues implicated in restatements is of concern to auditors and audit standard setters in gauging auditor litigation risk and audit risk. It also is important for financial analysis and securities valuation because investors' losses are greater, and recovery of losses on a percentage basis lower, when the auditor is a defendant, and especially when the auditor has a more severe, negative litigation experience (Commolli et al. 2012). We examine financial reporting lawsuits filed from 2001 through 2008 and find that revenue restatements - far more than any other kind of restatements - are associated with auditors being named defendants and also auditors experiencing a more severe, negative outcome in the litigation.