Litigation Risk and Audit Firm Characteristics

34 Pages Posted: 30 May 2007

See all articles by Jeffrey R. Casterella

Jeffrey R. Casterella

University of Auckland

Kevan L. Jensen

University of Oklahoma - John T. Steed School of Accounting

W. Robert Knechel

University of Florida - Fisher School of Accounting

Date Written: May 2007

Abstract

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

Casterella, Jeffrey R. and Jensen, Kevan L. and Knechel, W. Robert, Litigation Risk and Audit Firm Characteristics (May 2007). Available at SSRN: https://ssrn.com/abstract=989614 or http://dx.doi.org/10.2139/ssrn.989614

Jeffrey R. Casterella

University of Auckland ( email )

Auckland
New Zealand
970-2170947 (Phone)

Kevan L. Jensen (Contact Author)

University of Oklahoma - John T. Steed School of Accounting ( email )

307 West Brooks
Norman, OK 73019-4004
United States

W. Robert Knechel

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

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