An Experimental Investigation of the Efficacy of Lawyers' Letters

Posted: 16 Sep 2001

See all articles by Jack L. Krogstad

Jack L. Krogstad

Creighton University - Department of Accounting

Mark H. Taylor

University of South Florida, Muma College of Business, Lynn Pippenger School of Accountancy

Maribeth J. Stock

Union Pacific Railroad Company

Abstract

This experimental study investigates the efficacy of lawyers' letters in providing auditors with corroborating evidence about litigation contingencies. Fifty second- and third-year law students indicate their willingness to provide auditors with estimates of the likelihoods of unfavorable outcomes and potential damages for two realistic litigation cases. The findings indicate that (1) the potential loss of attorney-client privilege and (2) likelihoods of unfavorable litigation outcomes that approach auditors' lower bound for accrual both may inhibit lawyers' responses to auditors. Overall, these findings raise doubts about the efficacy of this widely utilized auditing procedure and lead to concerns about whether litigation contingencies and corresponding losses may be underreported in financial statements.

Keywords: Lawyers' letters; Contingent liabilities; Likelihood; Audit evidence

JEL Classification: M49, M41

Suggested Citation

Krogstad, Jack L. and Taylor, Mark H. and Stock, Maribeth J., An Experimental Investigation of the Efficacy of Lawyers' Letters. Available at SSRN: https://ssrn.com/abstract=276694

Jack L. Krogstad

Creighton University - Department of Accounting ( email )

Omaha, NE 68178
United States
402-280-2620 (Phone)

Mark H. Taylor (Contact Author)

University of South Florida, Muma College of Business, Lynn Pippenger School of Accountancy ( email )

4202 E. Fowler Avenue
Tampa, FL 33620
United States
(813) 974-6516 (Phone)

Maribeth J. Stock

Union Pacific Railroad Company

Omaha, NE 68179

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