| ||||||||
AUDITING, LITIGATION & TAX ABSTRACTS"National and Office-Specific Measures of Auditor Industry Expertise and Effects on Audit Quality"
KENNETH JOHN REICHELT, Louisiana State University, Baton Rouge - Department of Accounting Our paper examines whether audit quality is higher for industry audit specialists at the national and city-office levels using the framework developed in Ferguson et al. [2003] and Francis et al. [2005]. We find that auditors who are both national and city-specific industry specialists have clients with the lowest abnormal accruals, suggesting that joint national and city-specific industry specialists have the highest audit quality. In addition, we find some evidence that abnormal accruals of firms audited by city-industry specialists alone (without also being national specific industry specialists) are lower than those audited by non-industry specialists. Using alternative measures of audit quality, we find that when the auditor is both a national and a city-specific industry specialist, its clients are less likely to meet or beat analysts’ earnings forecasts by one penny per share and more likely to be issued a going-concern audit opinion. Together these results provide consistent evidence that audit quality is higher when the auditor is both a national and city-specific industry specialist, suggesting that auditors’ national positive network synergies and the individual auditors’ deep industry knowledge at the office level are jointly important factors in delivering higher audit quality.
JENNIFER J. GAVER, University of Georgia - J. M. Tull School of Accounting, Terry College of Business We hypothesize that when auditors face greater legal liability they will have less tolerance for loss reserve understatements by their insurance clients. To test this hypothesis, we analyze a sample of 6,033 loss reserve observations from 1993 through 2001. Consistent with Petroni (1992), we find that financially struggling insurers tend to under-reserve. This behavior is attenuated when the insurer is domiciled, headquartered, or licensed in a state which uses either the Restatement of Torts or the reasonable foreseeability standard to determine the auditor’s liability to third parties. Compared to the case where the auditor’s liability is defined by the legal concept of privity, these standards impose greater legal costs on auditors for ordinary negligence. The results suggest that auditors demand more conservative reporting when they face higher legal costs. "Litigation Risk and Market Reaction to Restatements"
KATSIARYNA SALAVEI, Fairfield University - Department of Finance A large negative stock price reaction to a restatement announcement could imply a particularly significant accounting error, or one made by a firm that has a relatively high probability of being sued. This paper investigates the extent to which market reactions to restatement announcements are explained by litigation risk. We model the simultaneous relationship between restatement announcement abnormal returns and litigation risk and find that about half of the -9.2 percent average restatement announcement effect is due to expected litigation costs. We also find that the significance of the accounting error does not directly affect the magnitude of the abnormal return; it only affects abnormal return indirectly because it increases the probability of being sued. "Business Valuation, DLOM and Daubert"
ROBERT COMMENT, Johns Hopkins University - Carey Business School Business valuations are a common subject of dispute in tax and divorce litigation, with the valuation consequences of private-company status of a closely held (often family) business being especially contentious. The valuation discount for illiquidity is traditionally referred to as the “liquidity discount� and more recently as the “discount for lack of marketability� or DLOM. It is not well known that core valuation methodologies such as DCF analysis have the effect of discounting the future cash flows of small businesses substantially, generally by 40% to 60%, for lack of size alone. Because there is a strong empirical relation between size and liquidity, there is a great likelihood that any incremental discounting for illiquidity or private-company status will be redundant and entail double discounting. Accordingly, the large liquidity discounts or DLOMs that are accepted practice and that have been embraced by many judges presumptively violate the Daubert requirement for reliability.
MARIANNE OJO, Center For European Law and Politics From the responses received from the European Commission’s consultation on control structures in audit firms and their consequences on the audit market, a consultation which was launched in November 2008, and whose deadline was scheduled for the end of February 2009, the role played by the facilitation of greater access to external financial capital as a means of increasing access to the audit market, hence opening up the market for the audit of international companies to more suppliers, and encouraging new market players, was acknowledged. However, this factor on its own, coupled with the need to amend current rules on the control of audit firms, namely through a relaxation of the rules – beyond that which is currently permitted under Article 3 of the 2006 Statutory Audit Directive, was not considered to be the most important source of impediment to the emergence of new players. Other further possible catalysts, both on the supply side (namely auditors) and the demand side (companies), were also considered vital to efforts aimed at encouraging more players in gaining access to the international audit market. This paper will focus on greater access to external financial capital - as a means of lowering barriers to the international audit market. In arriving at the conclusion that the benefits associated with the external investor model outweigh the possible risks it generates, the paper not only considers theories on managerial behaviour and ownership structure, but also gives attention to the safeguards for audit independence as listed under the 2002 Statutory Auditors’ Independence in the EU: A Set of Fundamental Principles, and the 2006 Statutory Audit Directive. It will also consider why, in view of the limitations and restrictions placed on audit firms, with particular reference to the Sarbanes Oxley Act of 2002, actions aimed at encouraging new market players at EU level, whilst ensuring that auditors’ independence and audit quality are not compromised, would also require a consideration of an international dimension of issues involved in lowering barriers to entry. | ||||||||
^top
Solicitation of Abstracts
Auditing, Litigation and Tax publishes abstracts of empirical, theoretical and experimental papers on auditing, litigation against auditors and corporations, and tax and accounting issues. Papers on the role of audits and their pricing, the industrial organization of auditing, expert systems in auditing, human resource management in auditing and many more related auditing topics are relevant. Litigation issues include the prediction of lawsuits against auditors and their clients, relation of lawsuits to corporate market value, effects of legislation on litigation, etc. Tax and accounting issues include, among others, the impact of taxes on transfer pricing and the location decisions, the interrelation of taxes and auditing, effect of taxes on accounting choice, etc.
Distribution ServicesIf your organization is interested in increasing readership for its research by starting a Research Paper Series, or sponsoring a Subject Matter eJournal, please email: RPS@SSRN.com Distributed by:DirectorsARN SUBJECT MATTER EJOURNALS ROSS L. WATTS Please contact us at the above addresses with your comments, questions or suggestions for ARN-Sub.
|
|
| | |||||
