Audit Firm Attributes and Auditor Litigation Risk

Minjung Kang, Ho Young Lee, Vivek Mande, Yong Sang Woo

Research output: Contribution to journalArticle

Abstract

This study examines the association between auditors' litigation risk and audit firm attributes. Using professional liability insurance premiums as a proxy for auditors' litigation risk, we present evidence that the risk is lower in audit firms having: (1) separate non-audit and audit divisions; (2) a higher proportion of partners; and (3) a higher annual growth in number of CPAs employed. Additionally, we find that the risk is higher in audit firms having: (1) operating losses; and (2) high revenue growth. Our results are consistent with the idea that audit firms' financial condition and organizational structure affect their independence/ expertise, and, in turn, their litigation risk. Our results are broadly supportive of the PCAOB's (2015) and US Department of Treasury's (2008) views that investors, audit committees, management, and other regulators could benefit from having access to financial and organizational information about audit firms.

Original languageEnglish
Pages (from-to)639-675
Number of pages37
JournalAbacus
Volume55
Issue number4
DOIs
Publication statusPublished - 2019 Dec 1

All Science Journal Classification (ASJC) codes

  • Accounting

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