When Are Audit Firms Sued for Financial Reporting Failures and What Are the Lawsuit Outcomes?

Posted: 13 Nov 2019

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Bing Li

City University of Hong Kong (CityUHK)

Date Written: September 25, 2019

Abstract

We examine how often audit firms are sued in a large sample of accounting lawsuits that allege financial reporting failures. We find an insignificant relation between the likelihood of auditor litigation and restatements but the likelihood of auditor litigation is strongly related to the types of alleged accounting deficiencies. We also find that the auditor’s type influences the probability of the auditor being sued and the size of the payouts from auditor and non-auditor defendants. In particular, the Big N firms are approximately 7% less likely than non-Big N firms to be named as co-defendants and the auditor’s contribution to the plaintiff’s payout is significantly larger when a Big N firm is sued. Overall, our findings suggest that auditors are rarely blamed when there are allegations of financial reporting failures but the types of accounting deficiencies and the auditor’s type significantly influence the probability of the audit firm being sued and the outcomes of the lawsuits.

Keywords: Accounting lawsuits, financial reporting failures, audit failures, lawsuit outcomes

JEL Classification: K22, M41, M42

Suggested Citation

Lennox, Clive and Li, Bing, When Are Audit Firms Sued for Financial Reporting Failures and What Are the Lawsuit Outcomes? (September 25, 2019). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3480706

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Bing Li

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Department of Accountancy, AC3
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/bingli/

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