Auditor Litigation: Deterrence Implications for Non-sued Auditors

39 Pages Posted: 24 Feb 2016 Last revised: 18 Dec 2019

See all articles by Sean Cao

Sean Cao

Georgia State University - J. Mack Robinson College of Business

Yangyang Fan

University of Pittsburgh - Katz Graduate School of Business

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation

Stephen P. Rowe

University of Arkansas

Multiple version iconThere are 2 versions of this paper

Date Written: December 5, 2019

Abstract

Litigation poses a significant business risk for auditors. We argue that litigation events involving other auditors’ deter audit firms from providing low quality audits. We find a significant subsequent decrease in the misstatement frequency of financial reports in within-industry audits conducted by auditors who did not face litigation. This industry-based across-auditor effect is further supported (a) by an increase in audit fees; (b) an increase in auditor going concern opinions; and (c) is robust to a battery of controls including the use of a difference-in-difference approach. By showing that auditor litigation leads to lower, rather than higher, misstatements across an industry, the findings expand our understanding of misstatement contagion evidenced in other accounting studies. We find no evidence of region-based across-auditor deterrence effect of litigation. Overall, by demonstrating a general deterrence effect of litigation for non-sued entities, this study significantly enhances the impact of litigation beyond just the sued entity.

Keywords: Auditor litigation, Restatements, Auditor learning, Audit fees

Suggested Citation

Cao, Sean S. and Fan, Yangyang and Narayanamoorthy, Ganapathi S. and Rowe, Stephen P., Auditor Litigation: Deterrence Implications for Non-sued Auditors (December 5, 2019). 27th Annual Conference on Financial Economics and Accounting Paper. Available at SSRN: https://ssrn.com/abstract=2736934 or http://dx.doi.org/10.2139/ssrn.2736934

Sean S. Cao

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

Yangyang Fan

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation ( email )

United States

Stephen P. Rowe (Contact Author)

University of Arkansas ( email )

Business Bldg. 450
Fayetteville, AR 72701
United States

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