The Settlement Norm in Audit Legal Disputes: Insights from Prominent Attorneys

Posted: 16 Oct 2019

See all articles by Eldar Maksymov

Eldar Maksymov

Arizona State University (ASU) - School of Accountancy

Jeffrey S. Pickerd

The University of Mississippi

D. Jordan Lowe

Arizona State University (ASU) - School of Accountancy

Mark E. Peecher

University of Illinois at Urbana-Champaign; University of Illinois College of Law

Andrew Reffett

Miami University of Ohio

Multiple version iconThere are 2 versions of this paper

Date Written: August 27, 2019

Abstract

Prior research indicates that most audit legal disputes settle. There is, however, little evidence of the factors that drive the settlement norm and its exceptions in audit legal disputes. To better understand these factors, we rely on theory related to how professionals manage risks and, as a result, how professions defend jurisdictional claims (e.g., Abbott 1988; Power 2004). We use this theoretical lens to help motivate four research questions that we probe by interviewing 27 prominent attorneys experienced in audit litigation. Consistent with our lens, our interview data indicate that attorneys manage their risks, including the risk of reputational loss, by settling based on their expectations of trial verdicts. Unlike trials, settlements simultaneously enable attorneys on both sides to limit costs and avoid catastrophic jury verdicts and, by doing so, claim “wins” for their clients. Attorneys also stress that they settle many audit disputes without any legal filings. Thus, a large subset of disputes is invisible to the public and researchers. Attorneys characterize trials as exceptions to the settlement norm that emerge due to abnormal conditions sometimes present in disputes. However, trial verdicts in these abnormal conditions help attorneys justify the use of settlements to clients, as attorneys stress that by settling they can avoid the dreaded possibility of extreme unfavorable verdicts. We conclude that as individual attorneys manage their risks, especially the risk of reputational loss, their profession maintains its public image and thereby defends its jurisdictional claims. Among the many questions we pose for future research is whether the settlement norm reduces society’s ability to monitor the audit profession and, more generally, whether this norm’s benefits outweigh its drawbacks.

Keywords: audit litigation, settlement norm, attorney risk management, defense of professional jurisdiction

Suggested Citation

Maksymov, Eldar M. and Pickerd, Jeffrey Scott and Lowe, D. Jordan and Peecher, Mark E. and Reffett, Andrew, The Settlement Norm in Audit Legal Disputes: Insights from Prominent Attorneys (August 27, 2019). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3465773

Eldar M. Maksymov (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Jeffrey Scott Pickerd

The University of Mississippi ( email )

University, MS 38677
United States

D. Jordan Lowe

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Mark E. Peecher

University of Illinois at Urbana-Champaign ( email )

Gies College of Business
1206 South Sixth Street
Champaign, IL 61820
United States
217-333-4542 (Phone)
217-244-0902 (Fax)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

Andrew Reffett

Miami University of Ohio ( email )

Oxford, OH 45056
United States

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