The Insurance Effect of Auditing in a Regulated and Low Litigation Risk Market: An Empirical Analysis of Big 4 Clients in China

2010 ◽  
Author(s):  
Feng Liu ◽  
Xijia Su ◽  
Mingahai Wei
Keyword(s):  
Empirical Analysis ◽  
Litigation Risk ◽  
Big 4 ◽  
Insurance Effect

The Insurance Hypothesis: An Examination of KPMG's Audit Clients around the Investigation and Settlement of the Tax Shelter Case

2013 ◽  
Vol 32 (4) ◽  
pp. 1-24 ◽  
Author(s):  
Darryl L. Brown ◽  
Susan Z. Shu ◽  
Billy S. Soo ◽  
Gregory M. Trompeter
Keyword(s):  
Financial Distress ◽  
Abnormal Returns ◽  
Natural Setting ◽  
Litigation Risk ◽  
Department Of Justice ◽  
News Reports ◽  
Insurance Hypothesis ◽  
Insurance Effect ◽  
Prior Literature ◽  
The U.S

SUMMARY Although prior literature has suggested that independent audits provide an implicit form of insurance against investor losses (the “insurance hypothesis”), it has been challenging to isolate the “insurance” effect. In this paper, we use a unique setting to examine this effect. In 2002, KPMG was investigated by the U.S. Department of Justice in relation to tax shelters sold by the firm. From then until early 2005, several news reports suggested that KPMG would be indicted and suffer potentially the same fate as Arthur Andersen. However, in August of 2005 KPMG entered into a deferred prosecution agreement with the U.S. Department of Justice, which ended widespread speculation of an impending federal indictment against the accounting firm. Because the investigation centered around tax services offered by the firm, we argue that the circumstances surrounding the investigation and settlement provide a natural setting to test the insurance value provided by auditors. We show that KPMG audit client firms experienced significant negative abnormal market returns when it appeared more likely that KPMG would face criminal charges, but earned significantly positive abnormal returns following news reports of an impending settlement. Further, these abnormal returns appear to be driven by KPMG client firms in greater financial distress or subject to greater litigation risk. These findings are consistent with the insurance hypothesis. Although we cannot completely eliminate other explanations such as an assurance effect or switching costs, we argue that such explanations are unlikely to drive our main findings.

The Big-4’s influence on rules-based accounting standards

2020 ◽  
Vol 18 (4) ◽  
pp. 729-755
Author(s):  
Amy K. Lysak
Keyword(s):  
Accounting Standards ◽  
Standard Setting ◽  
Change Score ◽  
Auditor Independence ◽  
Litigation Risk ◽  
Audit Risk ◽  
Accounting Firms ◽  
Content Type ◽  
Big 4 ◽  
Comment Letters

Purpose This study aims to evaluate whether the Big-4’s commenting efforts influence the characteristics of Financial Accounting Standards Board’s (FASB’s) Final_Standards using the content of their comment letters. Whether auditors lobby standard-setters to help their clients or to help themselves and whether they are successful are questions highly relevant to issues of auditor independence and audit effectiveness. Design/methodology/approach Based on components of Mergenthaler (2009), this study develops a rules-based continuum change score to measure how much more (less) rules-based a Final_Standard is compared to its exposure draft to evaluate the influence of the Big-4 on the FASB’s standard-setting for 63 accounting standards. Findings The findings show that extensive comment letters and increased uncertainty language are associated with increases in the rules-based attributes included in Final_Standards. These results suggest the Big-4 prioritize a reduction in their own litigation risk over the possible preferences of their clients for less rigid standards. Moreover, the results are consistent with their comment letters influencing the FASB’s decision to include more rules-based attributes in Final_Standards. Originality/value This study develops a potential proxy for audit risk by assessing the changes in the rules-based characteristics of proposed accounting standards and using the content of the comment letters to evaluate whether the Big-4 accounting firms may influence the FASB’s Final_Standards. Overall, this study provides a unique perspective on the influence of constituents on the FASB’s standard-setting.

Auditor Fees and Auditor Independence—Evidence from Going Concern Reporting Decisions in Germany

2013 ◽  
Vol 32 (4) ◽  
pp. 129-168 ◽  
Author(s):  
Nicole V. S. Ratzinger-Sakel
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Auditor Independence ◽  
Litigation Risk ◽  
Manufacturing Companies ◽  
Anglo Saxon ◽  
Going Concern ◽  
Big 4 ◽  
Reporting Decisions ◽  
Auditor Fees

SUMMARY This study examines the potential for non-audit services to impair auditor independence using going concern modifications as a proxy for audit quality. While prior research has focused primarily on Anglo-Saxon environments, this study focuses on Germany because of the country's unique reporting attributes and lower litigation risk when compared to Anglo-Saxon settings. Based on a sample of financially stressed manufacturing companies during the period 2005–2009, the results do not suggest that German auditors are less independent when the level of non-audit fees is high. However, there is some evidence that Big 4 audit firms are less likely than their non-Big 4 counterparts to issue a going concern emphasis-of-matter paragraph for engagements characterized by both relatively high levels of non-audit fees and financial stress.

Monitoring by Auditors: The Case of Public Housing Authorities

2011 ◽  
Vol 86 (4) ◽  
pp. 1289-1319 ◽  
Author(s):  
Barbara Murray Grein ◽  
Stefanie L. Tate
Keyword(s):  
At Risk ◽  
Public Housing ◽  
Financial Statements ◽  
Financial Information ◽  
Financial Data ◽  
Financial Statement ◽  
Litigation Risk ◽  
Management Incentives ◽  
Reporting Requirements ◽  
Big 4

ABSTRACT We take advantage of the unique reporting requirements of nonprofit public housing authorities (PHAs) to study the effect of audits on financial information both generally and when there are management incentives to misreport financial data. There is little prior research on the effect of audit adjustments in nonprofit settings and conflicting research on how auditors react to management's incentives to misreport. We identify potential financial statement areas at risk of manipulation based on incentives specific to public housing authorities. Using pre- and post-audit financial data for almost 3,600 PHAs across seven years, we find that auditors make economically and statistically significant adjustments to PHA financial statements. In addition, we find evidence that audits appear to reduce potential management bias, particularly to reduce risks of overstatement. Overall, audits appear to matter in this nonprofit, low-litigation risk setting where there is a large concentration of non-Big 4 auditors.

scholarly journals Auditors’ perceptions of their roles and responsibilities: The impact of exposure to litigation risk

Accounting ◽  
2021 ◽  
Vol 7 (6) ◽  
pp. 1435-1444 ◽  
Author(s):  
Ahmed Abdullah Saad Al-Dhubaibi
Keyword(s):  
Financial Statements ◽  
Third Parties ◽  
Litigation Risk ◽  
Certified Public Accountants ◽  
Audit Firm ◽  
Roles And Responsibilities ◽  
Big 4 ◽  
Audit Firms ◽  
Public Accountants ◽  
The Impact

The purpose of this study is to investigate the perception of auditors regarding their responsibilities and potential liabilities to third parties in the case of failure to detect fraud/material misstatements and report the findings to the appropriate party. The study proposes that auditors’ perception of their own responsibilities will depend on the level of litigation threat expected by the auditor based on his or her position in the audit firm. The questionnaire was sent to the big 4 audit firms, the global audit firms other than the big 4, and to 189 different sized local audit firms registered with the Saudi Organization of Certified Public Accountants (SOCPA). The findings of this study revealed significant variations among auditors with regards to their perceptions of their own responsibilities and liabilities to financial statements’ users affected by their expected level of exposure to litigation risk.

Big 4 Auditors, Litigation Risk, and Disclosure Tone

2017 ◽  
Author(s):  
Keith Czerney ◽  
Ling Lei Lisic ◽  
Biyu Wu ◽  
Ivy Zhang
Keyword(s):  
Litigation Risk ◽  
Big 4 ◽  
Disclosure Tone

Auditor Going Concern Opinions and Bank Systemic Risk: Evidence from the 2007–2009 Financial Crisis

2020 ◽  
Vol 39 (3) ◽  
pp. 1-28
Author(s):  
Anne Albrecht ◽  
Matthew Glendening ◽  
Kyonghee Kim ◽  
Raynolde Pereira
Keyword(s):  
Financial Crisis ◽  
Systemic Risk ◽  
Spillover Effects ◽  
Type I ◽  
Litigation Risk ◽  
Type I Errors ◽  
Crisis Period ◽  
Going Concern ◽  
Big 4 ◽  
Type Ii Errors

SUMMARY Following the 2007–2009 financial crisis, regulators and investor groups alleged that auditors were reluctant to issue going concern opinions (GCOs) to distressed banks during the crisis, raising questions about the quality of auditors' GCO decisions. This paper investigates whether systemic risk influences auditors' GCO decisions during the crisis due to potential adverse spillover effects. Using 496 bank-year observations, we find that auditors are less likely to issue a GCO to systemically risky banks, and this auditor behavior reduces Type I errors without increasing Type II errors. The effects are more pronounced during the crisis period, especially for banks that are large and connected, have lower litigation risk, or are audited by Big 4 auditors or industry specialists. Overall, our findings suggest that during the crisis period, auditors were less likely to over-issue GCOs to systemically risky banks, resulting in more accurate GCOs. JEL Classifications: M42; G20.

After Enron: Auditor Conservatism and Ex-Andersen Clients

2006 ◽  
Vol 81 (1) ◽  
pp. 49-82 ◽  
Author(s):  
Steven F. Cahan ◽  
Wei Zhang
Keyword(s):  
Control Sample ◽  
Litigation Risk ◽  
Multivariate Tests ◽  
Conservative Accounting ◽  
Big 4 ◽  
Abnormal Accruals ◽  
Unique Source ◽  
And Performance ◽  
Auditor Conservatism

This study examines whether after Arthur Andersen's demise, successor auditors required more conservative accounting for their ex-Andersen clients in order to minimize litigation risk. We use unadjusted and performance-adjusted measures of abnormal accruals, and we examine the level of and changes in the abnormal accruals of ex-Andersen clients in 2002 relative to a control sample of clients that were audited by a Big 4 auditor in 2001 and 2002. We conduct univariate and multivariate tests. In our multivariate tests, we control for other factors that may affect litigation risk crosssectionally. Our results indicate that the ex-Andersen clients had lower levels of and larger decreases in abnormal accruals in 2002. This is consistent with auditor conservatism and suggests the successor auditors viewed an Andersen audit as a unique source of litigation risk.

scholarly journals The impacts of interaction of audit litigation and ownership structure on audit quality

2021 ◽  
Vol 7 (1) ◽  
Author(s):  
Riyadh Jassim AL Abdullah ◽  
Mawih Kareem AL Ani
Keyword(s):  
Ownership Structure ◽  
Audit Quality ◽  
Litigation Risk ◽  
Minority Shareholders ◽  
Audit Opinion ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Litigation ◽  
Regression Techniques ◽  
The Impact

AbstractThis study examines the impact of the interactions of audit litigation and ownership structure on audit quality by Big 4 and non-Big 4 audit firms in Oman. This study uses modified audit opinion as proxies for audit quality, binary variable for audit litigation and percentage of shares owned by large shareholders and minority shareholders (consisting of Arab [non-GCC] shareholders) for ownership structure. The study uses size, risk, types of activity and ages of the firms as control variables. For the analysis and explanation of results descriptive statistics, correlation, regression techniques and T-test are used. Based on a sample of 107 listed companies on Muscat Securities Market (MSM) for 2013–2017, we find that audit litigation has a significant impact on audit quality for Big 4 audit firms, but not for non-Big 4 audit firms. Also, the results indicate that there is no difference between Big 4 and non-Big 4 audit firms as far as litigation risk is concerned.

Sign in / Sign up

Export Citation Format

Share Document