Federal Judge Ideology and the Going Concern Reporting Incentives of Big 4 and Non-Big 4 Auditors

64 Pages Posted: 23 Aug 2018 Last revised: 23 Jan 2019

See all articles by Tracy Gu

Tracy Gu

The University of Hong Kong (HKU), Accounting Division, Faculty of Business and Economics

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Date Written: August 9, 2018

Abstract

We analyze how variation in federal level legal liability associated with judge ideology affects the likelihood of firms receiving going-concern modified audit opinions. With auditors trading off between Type I and Type II reporting errors, the threshold value (of client bankruptcy probability) above which auditors issue going-concern reports is decreasing and convex in the level of federal litigation risk. Building on the literature showing that federal judge ideology affects the likelihood and outcome of lawsuits, we find that Big 4 and non-Big 4 auditors converge in their going-concern reporting decisions and Type I reporting error rates as federal litigation risk increases. This is caused by the greater effect of judge ideology on non-Big 4 than on Big 4 auditors. The key results remain with firm fixed effects and are not driven by the effects of judge ideology on auditor choice or bankruptcy probability.

Keywords: Federal Judge Ideology, Federal Litigation Risk, Going Concern Modified Audit Opinions, Big 4 and Non-Big 4

JEL Classification: G39, M40, M42

Suggested Citation

Gu, Tracy (Ti) and Hui, Kai Wai and Simunic, Dan A., Federal Judge Ideology and the Going Concern Reporting Incentives of Big 4 and Non-Big 4 Auditors (August 9, 2018). Available at SSRN: https://ssrn.com/abstract=3229115 or http://dx.doi.org/10.2139/ssrn.3229115

Tracy (Ti) Gu (Contact Author)

The University of Hong Kong (HKU), Accounting Division, Faculty of Business and Economics ( email )

#1312, KK Leung Building
Pokfulam Road
Hong Kong
+852 3917-8345 (Phone)

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
217
Abstract Views
1,810
rank
150,657
PlumX Metrics