Litigation Against Auditors
Routledge Companion to Auditing, edited by David Hay, W. Robert Knechel and Marleen Willeken, 2013
Posted: 12 Apr 2014
Date Written: 2013
Auditors are subject to litigation exposure under federal securities laws and under state law. Research into auditors’ liability under federal securities laws tends to make use of publicly available data from class action suits to examine factors associated with the incidence of litigation against auditors, the extent to which the legal merits of the case influence incidence and outcomes of those cases, and the impact of legal reform on litigation against auditors. State law does not generally allow class actions suits, so public data are not available. Research in this area focuses on understanding the process by which jurors and judges assess auditor blame for client misstatements. It considers similar issues, including the extent to which the merits of the case versus legally irrelevant factors impact the resolution of the case. Market-based experiments examine the effects of various legal regimes on auditor and social welfare. We summarize research results in these areas and identify important areas for future research, including examining the effects of potential decreases in auditor liability on social welfare, deepening our understanding of the conditions under which the merits of the case are appropriately reflected in case outcomes, and improving our understanding of how parties determine whether to settle and how juries set damage awards.
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