The Joint Effects of Multiple Legal System Characteristics on Auditing Standards and Auditor Behavior

62 Pages Posted: 20 Jun 2013 Last revised: 6 Apr 2015

See all articles by Dan A. Simunic

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Minlei Ye

University of Toronto

Ping Zhang

University of Toronto - Rotman School of Management

Date Written: April 2015

Abstract

This paper derives the impacts of legal system characteristics and auditing standards on auditor behavior (audit quality), and analyzes the determination of optimal auditing standards under different legal regimes. Legal regimes are characterized by differences in the uncertainty concerning the outcome of legal proceedings (termed vagueness of legal systems) and differences in the average size of damage awards. Auditing standards as determined by standard setters can vary in both toughness and vagueness. Our analysis provides implications for the adoption of International Standards on Auditing (ISAs). Countries, such as the U.S., where auditor legal liability is significantly more onerous than the global norm are not likely to adopt ISAs, since these standards may not induce auditors to provide the optimal level of audit quality. Conversely, the adoption of ISA’s by countries, such as China, where the legal system makes the recovery of damages from auditors quite difficult, is not by itself likely to result in a high level of audit quality. Furthermore, our model suggests that auditor rotation can help improve audit quality, but only in certain circumstances.

Keywords: Auditing standards, legal regimes, international standards

JEL Classification: M41

Suggested Citation

Simunic, Dan A. and Ye, Minlei and Zhang, Ping, The Joint Effects of Multiple Legal System Characteristics on Auditing Standards and Auditor Behavior (April 2015). Rotman School of Management Working Paper No. 2281270, Available at SSRN: https://ssrn.com/abstract=2281270 or http://dx.doi.org/10.2139/ssrn.2281270

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

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Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
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Minlei Ye (Contact Author)

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Ping Zhang

University of Toronto - Rotman School of Management ( email )

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

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