Audit Firm Attributes and Auditor Litigation Risk

Abacus ◽  
2019 ◽  
Vol 55 (4) ◽  
pp. 639-675
Author(s):  
Minjung Kang ◽  
Ho‐Young Lee ◽  
Vivek Mande ◽  
Yong‐Sang Woo
Keyword(s):  
Litigation Risk ◽  
Audit Firm ◽  
Firm Attributes ◽  
Auditor Litigation

An Empirical Investigation of IPO Underpricing and the Change to the LLP Organization of Audit Firms

2004 ◽  
Vol 23 (1) ◽  
pp. 53-67 ◽  
Author(s):  
Steven R. Muzatko ◽  
Karla M. Johnstone ◽  
Brian W. Mayhew ◽  
Larry E. Rittenberg
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Limited Liability ◽  
Litigation Risk ◽  
Ipo Underpricing ◽  
Audit Firm ◽  
Legal Structure ◽  
Audit Firms ◽  
Public Offering

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incentives for intrafirm monitoring by partners within an audit firm. Prior research suggests that underpricing protects underwriters from litigation damages, and that the level of underpricing varies inversely with both the amount of implicit insurance provided by the audit firm and the quality of the audit services provided. We hypothesize the change in audit firm legal structure reduced the assets available from audit firms in IPO-related litigation and indirectly reduced audit quality by lowering intrafirm monitoring. As a result, underwriters have incentives as a joint and several defendant with the audit firms to increase IPO underpricing, particularly for high-litigation-risk IPOs, following audit firms' shifts to LLP status. Our findings are consistent with this hypothesis.

Litigation Risk and Audit Firm Characteristics

2010 ◽  
Vol 29 (2) ◽  
pp. 71-82 ◽  
Author(s):  
Jeffrey R. Casterella ◽  
Kevan L. Jensen ◽  
W. Robert Knechel
Keyword(s):  
Insurance Companies ◽  
Prior History ◽  
Continuous Measure ◽  
Litigation Risk ◽  
Insurance Company ◽  
Firm Characteristics ◽  
Audit Firm ◽  
Growth Firms ◽  
History Of ◽  
Using Data

SUMMARY: This study examines the association between certain audit firm characteristics and audit firm litigation risk. Previous research shows a link between audit client characteristics and audit firm litigation risk. However, insurance companies do not make extensive use of financial information about individual audit clients to make risk assessments. Instead, they primarily use information about the audit firms themselves. Using data from a large insurance company, we examine the link between several audit firm characteristics and audit-related litigation. Based on a dichotomous measure of risk (existence of a lawsuit), we find that larger firms, firms experiencing rapid growth, firms that sue their clients, and firms with a history of problems all face greater litigation risk. Introducing a continuous measure of the cost of litigation we find, in addition to the previously mentioned risk factors, that firms with a prior history of regulatory problems and firms that choose smaller deductibles are more risky to the insurance company. However, our proxies for independence and expertise are not associated with litigation risk.

scholarly journals Affiliation of local audit firms with Big4 auditors and capital structure: evidence from Indonesia

2020 ◽  
Vol 35 (6) ◽  
pp. 731-757
Author(s):  
Heny Kurniawati ◽  
Philippe Van Cauwenberge ◽  
Heidi Vander Bauwhede
Keyword(s):  
Capital Structure ◽  
Information Asymmetry ◽  
Listed Companies ◽  
Ordinary Least Squares ◽  
Litigation Risk ◽  
Content Type ◽  
Audit Firm ◽  
Audit Firms ◽  
Negative Effect ◽  
Second Tier

Purpose This paper aims to investigate whether the choice for a Big4-affiliated local audit firm affects the capital structure of listed companies in Indonesia, a fast-growing emerging country that is characterized by high information asymmetry and low litigation risk. A unique characteristic of the Indonesian audit environment is that Big4 auditors can only enter the market indirectly through affiliation with a local audit firm. Design/methodology/approach A sample of Indonesian listed companies between 2008 and 2015 is used to investigate this relation using ordinary least squares (OLS). To address the concern that the choice for Big4-affiliated auditors might reflect client characteristics, the authors also perform OLS on a matched sample, using both propensity-score and entropy-balance matching. Findings Across all three samples, the authors document that companies audited by a Big4-affiliated local audit firm display lower debt ratios. The authors find no such effect for affiliation with second-tier audit firms. Surprisingly, they find that the negative effect of Big4 affiliation is increasing in client size. Research limitations/implications This study provides evidence of the consequences of hiring Big4 auditors on the perceived information asymmetry by financial markets under extreme conditions: in an environment characterized by low litigation risk and where Big4 auditors can operate only indirectly through affiliation. Practical implications The results of this study are of interest to policymakers, managers and financial stakeholders in emerging countries where external financing is important yet difficult to obtain because of severe information asymmetry. Hiring a Big4 auditor, even only through affiliation, might reduce perceived information asymmetry and increase the access to external equity financing. Originality/value To the best of the authors’ knowledge, this study is the first to provide evidence of the effect of Big4 auditors on their clients’ capital structure when they can operate only indirectly through affiliation with a local auditor.

The Effects of Critical Audit Matter Removal and Duration on Jurors' Assessments of Auditor Negligence

2018 ◽  
Vol 38 (3) ◽  
pp. 183-202 ◽  
Author(s):  
Jeremy M. Vinson ◽  
Jesse C. Robertson ◽  
R. Cameron Cockrell
Keyword(s):  
Control Model ◽  
Primary Concern ◽  
Litigation Risk ◽  
Subsequent Removal ◽  
Auditor Liability ◽  
Audit Firms ◽  
One Year ◽  
Auditor Litigation

SUMMARY A primary concern facing the PCAOB's requirement of disclosing critical audit matters (CAMs) is increased auditor litigation risk. Evidence with Key Audit Matters from the U.K. indicates auditors may subsequently remove a CAM or continue to report the same CAM for several years. Therefore, we investigate the effects of CAM removal and duration on jurors' assessments of auditor negligence when there is a subsequent material misstatement due to fraud in the account related to the CAM. Using the Culpable Control Model, we predict jurors will assess higher auditor negligence when a CAM is removed than when a CAM is reported and when a CAM is reported for multiple years than for one year. Results from two experiments support our expectations, although results vary depending on complexity of the misstated account. Overall, our findings highlight a quandary for audit firms, where subsequent removal of a CAM increases auditor liability.

Auditor Litigation Risk and the Number of Institutional Investors

2017 ◽  
Vol 37 (3) ◽  
pp. 71-90 ◽  
Author(s):  
Cory A. Cassell ◽  
Michael S. Drake ◽  
Travis A. Dyer
Keyword(s):  
Institutional Investors ◽  
Audit Fees ◽  
Common Stock ◽  
Litigation Risk ◽  
The Common ◽  
Auditor Litigation

SUMMARY 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.

Audit Firm Characteristics and Litigation Risk in Nigeria

2016 ◽  
Vol 5 (4) ◽  
pp. 57-72
Author(s):  
Onatuyeh Aruobogha Edwin ◽  
Nwabuko Oluchi Bavy
Keyword(s):  
Litigation Risk ◽  
Firm Characteristics ◽  
Audit Firm

scholarly journals Female Audit Partners and Extended Audit Reporting: UK Evidence

2020 ◽  
Author(s):  
Tarek Abdelfattah ◽  
Mohamed Elmahgoub ◽  
Ahmed A. Elamer
Keyword(s):  
Gender Diversity ◽  
Communication Style ◽  
Writing Style ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Reports ◽  
Partner Gender ◽  
Firm Attributes

Abstract This study investigates whether audit partner gender is associated with the extent of auditor disclosure and the communication style regarding risks of material misstatements that are classified as key audit matters (KAMs). Using a sample of UK firms during the 2013–2017 period, our results suggest that female audit partners are more likely than male audit partners to disclose more KAMs with more details after controlling for both client and audit firm attributes. Furthermore, female audit partners are found to use a less optimistic tone and provide less readable audit reports, compared to their male counterparts, suggesting that behavioural variances between female and male audit partners may have significant implications on their writing style. Therefore, this study offers new insights on the role of audit partner gender in extended audit reporting. Our findings have important implications for audit firms, investors, policymakers and governments in relation to the development, implementation and enforcement of gender diversity.

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