Litigation Risk and Abnormal Accruals

Posted: 17 Nov 2010 Last revised: 23 Jun 2011

See all articles by Jeff P. Boone

Jeff P. Boone

University of Texas at San Antonio - Department of Accounting

Inder K. Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

K. K. Raman

The University of Texas at San Antonio

Date Written: November 17, 2010

Abstract

In this paper, we examine the relation between auditor litigation risk and abnormal accruals over the 1989-2007 time period. We address potential endogeneity in prior studies by jointly modeling abnormal accruals and litigation risk in a simultaneous equation system. Our findings suggest that client-specific litigation risk affects auditor incentives to acquiesce to client demands for earnings management, i.e., the higher the risk of auditor litigation, the greater the auditor’s restraining influence on the abnormal accruals reported by the client. We also find evidence that abnormal accruals increase the likelihood of auditor litigation. We also document that the 1995 Public Securities Litigation Reform Act (PSLRA) lowered the client-specific risk of auditor litigation. Litigation reform remains a topic of ongoing interest. Our findings contribute to a better understanding of the effects of litigation reform (and related changes in legal exposure) on auditor incentives and earnings management.

Keywords: Litigation Risk, Abnormal Accruals, Auditor Incentives

Suggested Citation

Boone, Jeff P. and Khurana, Inder and Raman, K. K., Litigation Risk and Abnormal Accruals (November 17, 2010). Auditing: A Journal of Practice & Theory, May 2011, 30(2): pp. 231-256. Available at SSRN: https://ssrn.com/abstract=1710663

Jeff P. Boone

University of Texas at San Antonio - Department of Accounting ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Inder Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-882-3474 (Phone)
573-882-2437 (Fax)

K. K. Raman (Contact Author)

The University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8749 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
747
PlumX Metrics