The Changing Landscape of Auditor Litigation
62 Pages Posted: 30 Nov 2017 Last revised: 16 Aug 2020
Date Written: September 27, 2017
We provide a comprehensive overview of shareholder litigation against auditors since the passage of the PSLRA. The number of lawsuits per year has declined, dismissals have increased, and settlements in recent years have declined. Our study asks why. Because we find that the likelihood an auditor is sued following a severe restatement has significantly declined in recent years, it does not appear that the decline can be attributed solely to increases in audit quality. Instead, we consider whether the Supreme Court cases limiting the scope of Rule 10b-5 against private actors may have led to the decline. To study this possibility, we focus on the Supreme Court’s 2007 and 2011 rulings in Tellabs v. Makor and Janus v. First Derivative, respectively. Our analysis provides strong evidence that the higher liability standards imposed by Janus significantly reduced auditors’ liability exposure, but we find only limited evidence that the pleading standard imposed by Tellabs had a significant effect.
Keywords: auditor litigation, Tellabs, Section 10(b), Section 11, audit quality, Janus, PSLRA, class-action litigation
JEL Classification: K22, K41, G14, M41, M42
Suggested Citation: Suggested Citation