Litigation Risk and Audit Pricing: The Role of Public Equity
University of Notre Dame
Bjorn N. Jorgensen
University of Colorado at Boulder
Sharon P. Katz
Columbia Business School - Accounting, Business Law & Taxation
William R. Kinney, Jr.
University of Texas at Austin - Department of Accounting
February 1, 2013
Does de facto audit litigation risk arising from regulatory and market factors for U.S. public equity firms affect audit pricing? The answer is important for evaluating the efficiency of regulatory regime design and for understanding audit production economics. For U.S. firms with publicly-traded debt, we hold constant the regulatory regime, including issuer reporting mandates and auditor responsibilities, but compare those with public equity and otherwise similar private equity firms and thus vary market factors and de facto litigation risk. In cross-section, we find that the fees of public equity firms are 16% to 25% higher than private firms. Results are consistent with higher audit litigation risk arising from public equity ownership due to readily available equity prices to quantify potential damage claims imposing substantial incremental audit fees. Time-series comparisons for firms that change ownership status yield qualitatively similar fee decreases for going-private firms and significantly larger fee increases for going-public firms.
Number of Pages in PDF File: 50
Keywords: public and private firms, ownership structure, audit fees, litigation risk
JEL Classification: M41, M42, M44working papers series
Date posted: January 4, 2013 ; Last revised: August 22, 2013
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