Auditor Litigation: Evidence that Revenue Restatements Are Determinative
Research in Accounting Regulation, Volume 26(2),164-174, October 2014
33 Pages Posted: 27 Apr 2014 Last revised: 25 Feb 2018
Date Written: April 24, 2014
This study extends the Palmrose and Scholz (2004) general litigation and general restatements study by focusing on auditor litigation and revenue restatements. We investigate all potential accounting issues, individually, instead of by their group method, with regard to auditor litigation. The impact of the individual accounting issues implicated in restatements is of concern to auditors and audit standard setters in gauging auditor litigation risk and audit risk. It also is important for financial analysis and securities valuation because investors’ losses are greater, and recovery of losses on a percentage basis lower, when the auditor is a defendant, and especially when the auditor has a more severe, negative litigation experience (Commolli et al. 2012). We examine financial reporting lawsuits filed from 2001 through 2008 and find that revenue restatements – far more than any other kind of restatements – are associated with auditors being named defendants and also auditors experiencing a more severe, negative outcome in the litigation.
Keywords: restatement, revenue restatement, auditor litigation, auditor defendants, auditor outcomes
JEL Classification: K00, K22, K41, M41
Suggested Citation: Suggested Citation