Naming Auditor Defendants in Securities Class Actions
Posted: 31 May 1998
In recent years, the risk to auditors of being named defendants in private securities class actions has been of concern, not only to auditors, but also to those concerned with facilitating capital formation. Nonetheless, there has been no empirically tested model that credibly demonstrates the factors associated with naming auditors defendants in private securities class actions. A theory based on Kinney (1993) framework is developed to differentiate between securities class actions with auditor defendants versus securities class actions without auditor defendants. The theory is empirically tested. Asymptotic and, where necessary, exact logistic regression are used. In 86 of 476 securities lawsuits commenced from April 1992 to April 1995, an auditor was named a defendant. Five independent variables are positively associated with naming the auditor a defendant: the issuance of an Accounting and Auditing Enforcement Release where the auditor and management are charged with wrongdoing; the issuance of an Accounting and Auditing Enforcement Release where management, but not the auditor, are charged with wrongdoing; auditee bankruptcy; plaintiff class period length; and a restatement of previously issued audited annual financial statements.
JEL Classification: G38, K22, K41
Suggested Citation: Suggested Citation