Litigation Risk and Audit Firm Characteristics
34 Pages Posted: 30 May 2007
Date Written: May 2007
This paper examines the association between audit-firm characteristics and audit-related litigation risk. Previous litigation risk studies have been limited to examining audit-client characteristics, as audit-firm data has generally been unavailable, or available only for a very small set of homogeneous firms (e.g., the Big 4). Using data from an insurance company specializing in providing professional liability insurance to a wide range of accounting firms, we develop and test a model of litigation risk that includes audit-firm characteristics likely to be related to audit failure and/or litigation: firm expertise, audit-process quality/consistency, compliance with professional standards, and general attitudes regarding independence and risk. We find evidence that four of these five characteristics are associated with litigation risk. We also find that firm size, litigation history, and jurisdiction are strongly associated with audit-related litigation risk.
Keywords: Litigation risk, Audit failure, Audit-firm characteristics
JEL Classification: K41, K42, M49, G22
Suggested Citation: Suggested Citation