Is Scrutiny by Plaintiffs’ Lawyers Associated with Audit Outcomes?

Abstract

Kartapanis and Yust (2022) propose the number of views of the SEC filings by plaintiffs’ lawyers of security class actions as an ex ante measure of litigation and find that views are positively associated with future litigations and case outcomes. We empirically evaluate the validity of the views measure in the auditing context. In comparison to the existing measures of litigation risk- the high litigation industry indicator and the Kim and Skinner (2012) measure, we find that only the measures based on the number of views are consistently and significantly associated with audit fees, going concern opinion, and auditor resignation. Further, when we include views along with the two existing measures in the model at the same time, only the measures based on the views are significant, indicating that the number of views is incrementally informative about the three audit outcomes. We also find similar results in cross-sectional tests based on auditor types and litigation likelihood. A one standard deviation increase in the number of views increases audit fees by about 14 to 19 percent, the likelihood of going concern opinions by about 16 to 17 percent, and the likelihood of auditor resignation by about 23 to 30 percent. The incremental contribution of the measures based on the views over the extant measures supports the notion that the plaintiffs' lawyers are aware of material, adverse information that is not yet public. Our findings are relevant to researchers and practitioners interested in examining the impact of litigation on audit phenomena as well as in settings where litigation risk is a control variable.

Keywords: Litigation, plaintiff lawyer, audit fees, going concern, auditor resignation, EDGAR.