Auditor Experience and the Timeliness of Litigation Loss Contingency Disclosures

36 Pages Posted: 21 Nov 2012 Last revised: 13 Jun 2017

See all articles by Feng Chen

Feng Chen

University of Toronto - Rotman School of Management

Yu Hou

Queen's University - Smith School of Business

Gordon D. Richardson

University of Toronto - Rotman School of Management

Minlei Ye

University of Toronto - Rotman School of Management; University of Toronto at Mississauga - Department of Management

Date Written: March 15, 2017

Abstract

This paper hypothesizes and finds that firms audited by city-industry specialists have more timely disclosures of contingent losses from litigation, when there is no news coverage relating to the legal case prior to management disclosures. A closer examination reveals that this result is explained by the specialist auditors’ prior experience auditing clients in the same office and industry who are involved with litigation. In our setting, disclosures of litigation-related contingent losses, we identify two kinds of knowledge generated from experience, industry knowledge and litigation knowledge. Industry knowledge helps auditors detect and correct a poor implementation of guidance for litigation loss contingency disclosures. Auditors gain litigation knowledge from auditing clients in a given office and industry with previous involvement as defendants. Thus, the two types of knowledge interact in their effects on reporting outcomes.

Keywords: Litigation Loss Contingency Disclosures, Auditor Industry Specialization, Litigation Experience

JEL Classification: K41, M41, M42

Suggested Citation

Chen, Feng and Hou, Yu and Richardson, Gordon D. and Ye, Minlei, Auditor Experience and the Timeliness of Litigation Loss Contingency Disclosures (March 15, 2017). Contemporary Accounting Research, Forthcoming; Rotman School of Management Working Paper No. 2179148. Available at SSRN: https://ssrn.com/abstract=2179148 or http://dx.doi.org/10.2139/ssrn.2179148

Feng Chen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Yu Hou

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Gordon D. Richardson (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8601 (Phone)
416-971-3048 (Fax)

Minlei Ye

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Mississauga - Department of Management ( email )

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