State Liability Regimes within the United States and Auditor Reporting

Posted: 31 Dec 2013 Last revised: 13 Apr 2016

See all articles by Divya Anantharaman

Divya Anantharaman

Rutgers, The State University of New Jersey - Accounting & Information Systems

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Nader Wans

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: February 15, 2016

Abstract

We examine how state liability regimes within the United States affect auditor reporting decisions. We exploit variation across state-level common law in two aspects of auditor liability: the extent to which auditors can be held liable by third parties for negligence, and rules for apportioning liability across multiple defendants. We find that auditors are more likely to issue a modified going-concern (GC) report to financially distressed clients from high-liability states than to those from low-liability states. We sharpen inferences using a natural experiment that examines the causal effects of two exogenous shocks to auditor third-party liability standards, which dramatically restricted auditors' liability in New Jersey in 1995 and in California in 1992. Results from difference-in-differences tests imply that auditors' propensity to issue a modified opinion for client firms in New Jersey and California decreases significantly after the decline in auditors' litigation exposure, relative to control firms from other jurisdictions. These findings add to our understanding of how litigation risk affects auditor behavior and highlight an important source of variation in litigation risk within the U.S. that has seldom been studied to date.

Keywords: Auditor litigation risk, state common-law, going concern opinions

Suggested Citation

Anantharaman, Divya and Pittman, Jeffrey A. and Wans, Nader, State Liability Regimes within the United States and Auditor Reporting (February 15, 2016). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2372993 or http://dx.doi.org/10.2139/ssrn.2372993

Divya Anantharaman

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
#916
Newark, NJ 07102
United States

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Nader Wans

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada

Register to save articles to
your library

Register

Paper statistics

Abstract Views
757
PlumX Metrics