The Effects of the Extant Clauses Limiting Auditor Liability on Audit Fees and Overall Reporting Quality

Journal of Empirical Legal Studies (Forthcoming)

46 Pages Posted: 23 Jan 2015 Last revised: 27 Mar 2019

See all articles by Henock Louis

Henock Louis

Pennsylvania State University - Smeal College of Business

Tom Pearson

University of Hawaii

Dahlia Robinson

University of South Florida

Michael Robinson

University of Tampa

Amy X. Sun

University of Houston

Multiple version iconThere are 2 versions of this paper

Date Written: August 10, 2018

Abstract

Regulators and shareholders generally oppose any restriction on clients’ rights to sue their auditors, believing that such restrictions would impair reporting quality. However, the evidence suggests that the opposition to limitation of liability agreements (LLAs) between clients and auditors is likely unwarranted. Specifically, the evidence indicates that LLAs are beneficial to clients by lowering their audit fees. More importantly, we find no evidence that they impair financial reporting quality in general. Hence, the extant contracts limiting clients’ rights to sue their auditors appear to benefit auditors and their clients without any apparent detriment to the quality of financial reporting.

Keywords: Auditor liability; liability limiting agreement; audit quality; reporting quality

JEL Classification: M42, K22, K41

Suggested Citation

Louis, Henock and Pearson, Tom and Robinson, Dahlia and Robinson, Michael and Sun, Amy X., The Effects of the Extant Clauses Limiting Auditor Liability on Audit Fees and Overall Reporting Quality (August 10, 2018). Journal of Empirical Legal Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2553562 or http://dx.doi.org/10.2139/ssrn.2553562

Henock Louis (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

Tom Pearson

University of Hawaii ( email )

Honolulu, HI 96822
United States

Dahlia Robinson

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States
8139746888 (Phone)

Michael Robinson

University of Tampa ( email )

401 W Kennedy Blvd
Tampa, FL 33606
United States

Amy X. Sun

University of Houston ( email )

Bauer College of Business
334 Melcher Hall, 390H
Houston, TX 77204
United States
7137435682 (Phone)

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