The Impact of Legal Liability Regimes and Differential Client Risk on Client Acceptance, Audit Pricing, and Audit Effort Decisions

25 Pages Posted: 25 Mar 2011

See all articles by Audrey A. Gramling

Audrey A. Gramling

Oklahoma State University - Stillwater - School of Accounting

Jeffrey W. Schatzberg

University of Arizona - Department of Accounting

Andrew Bailey

affiliation not provided to SSRN

Hao Zhang

University of Macau - Faculty of Business Administration

Date Written: 1998

Abstract

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

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

Audrey A. Gramling

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
345 Business Building
Stillwater, OK 74078
United States

Jeffrey W. Schatzberg

University of Arizona - Department of Accounting ( email )

McClelland Hall 301
Tucson, AZ 85721
United States
520-621-2238 (Phone)
520-621-3742 (Fax)

Andrew Bailey

affiliation not provided to SSRN ( email )

Hao Zhang (Contact Author)

University of Macau - Faculty of Business Administration ( email )

Macau

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