25 Pages Posted: 25 Mar 2011
Date Written: 1998
This study uses experimental methods to examine client acceptance, auditor pricing and effort decisions for clients of varying risk under two legal rules, joint and several liability, and proportionate liability. We predict greater availability of audit services for high-risk clients, lower audit prices, and lower audit effort under proportionate liability relative to joint and several liability. Our experimental evidence does not strongly support predicted prices due to underpricing behavior, but prices do reflect risk differences across client groups for both liability regimes. The results also exhibit some support for the predictions that auditors select low effort for the lowest-risk clients, and a lower effort level under proportionate liability relative to joint and several liability for moderate risk clients. As predicted for the highest-risk clients, high effort is selected under proportionate liability, and there is some evidence of a substantial reduction in contracting under joint and several liability.
Keywords: Audit risk, Audit Pricing, Legal Liability
JEL Classification: M41, M42
Suggested Citation: Suggested Citation
Gramling, Audrey A. and Schatzberg, Jeffrey W. and Bailey, Andrew and Zhang, Hao, The Impact of Legal Liability Regimes and Differential Client Risk on Client Acceptance, Audit Pricing, and Audit Effort Decisions (1998). Journal of Accounting, Auditing and Finance, Vol. 13, 1998. Available at SSRN: https://ssrn.com/abstract=1788871