Does the Disclosure of PCAOB Inspection Findings Increase Audit Firms' Litigation Exposure?

Forthcoming in The Accounting Review, https://doi.org/10.2308/TAR-2018-0151

Posted: 9 Jul 2020 Last revised: 13 Jul 2020

See all articles by Brant E. Christensen

Brant E. Christensen

Brigham Young University

Nathan G. Lundstrom

University of Kansas

Nathan J. Newton

Florida State University

Date Written: May 20, 2020

Abstract

We examine whether PCAOB inspection reports increase auditors' litigation risk. We find that inspection reports with audit deficiencies are positively associated with the number of lawsuits subsequently filed against the inspected auditor. These results are strongest when client-level lawsuit triggering events have already occurred and when PCAOB inspection content is arguably more persuasive. Importantly, these results pertain exclusively to triennially inspected audit firms for which the set of other publicly available signals of audit quality is limited. Furthermore, we do not argue that inspection reports in isolation trigger lawsuits. Instead, once events such as restatement announcements or bankruptcies create the potential for legal action against the auditor, inspection reports provide a public signal about past noncompliance with auditing standards. This signal likely increases lawyers' perceived strength of case against the auditor before the lawsuit is filed and before lawyers have access to the audit workpapers.

Keywords: PCAOB, PCAOB inspections, auditor litigation, audit regulation

Suggested Citation

Christensen, Brant E. and Lundstrom, Nathan G. and Newton, Nathan J., Does the Disclosure of PCAOB Inspection Findings Increase Audit Firms' Litigation Exposure? (May 20, 2020). Forthcoming in The Accounting Review, https://doi.org/10.2308/TAR-2018-0151, Available at SSRN: https://ssrn.com/abstract=3640429

Brant E. Christensen (Contact Author)

Brigham Young University ( email )

United States

Nathan G. Lundstrom

University of Kansas ( email )

1654 Naismith Drive
Lawrence, KS 66045
United States

Nathan J. Newton

Florida State University ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

HOME PAGE: http://https://business.fsu.edu/person/nate-newton

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