Author: Paul J. Beck
Publisher:
ISBN:
Category :
Languages : en
Pages : 61
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Book Description
Using D&O insurance premia from the 2001-2004 Tillinghast D&O insurance surveys as a proxy for litigation risk, we show that audit fees are positively associated with litigation risk even after controlling for several quantitative risk factors known to influence both the insurance premium and audit fee. We attribute this positive association to the parallel development of risk assessment expertise by both D&O insurers and auditors and to their overlapping sources of qualitative risk information. The significant association between D&O premia and audit fees also provides external validation for the auditor's risk assessment process. Finally, we partition accounting firms based on their audit methodologies and find that the audit fees charged by risk-based auditors are more strongly associated with litigation risk than those charged by firms using more traditional audit approaches.
Author: Ananth Seetharaman
Publisher:
ISBN:
Category :
Languages : en
Pages : 25
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Book Description
This study re-examines the relationship between litigation risk and audit pricing. Two necessary ingredients to empirically examine this relationship are (a) a litigious legal environment, and (b) publicly disclosed auditor remuneration. Prior studies have not been able to comprehensively examine this relationship because the most litigious country in the world, the U.S., does not require auditor remuneration to be publicly disclosed. Conversely, countries that require companies to disclose auditor remuneration in their financial statements (e.g., Hong Kong, Australia, and the UK) typically have a relatively benign litigation environment. In this study, we straddle publicly disclosed auditor remuneration and a highly litigious environment by focusing on UK firms cross-listed on U.S. stock exchanges. We find that, after controlling for other factors, UK firms tend to charge higher fees for their services when their clients are cross-listed on major U.S. stock exchanges. We, however, find no evidence of higher audit fees when UK firms cross-list on non-U.S. foreign exchanges. These findings are consistent with the prediction that audit fees will reflect risk differences across liability regimes.
Author: Miguel Minutti-Meza
Publisher:
ISBN:
Category :
Languages : en
Pages : 22
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Book Description
A large body of research has studied audit fees aiming to determine whether they reflect auditors' response to clients' risks, auditors' expertise, competitive pressures in the audit market, and independence issues between auditors and clients. Badertscher, Jorgensen, Katz, and Kinney [2014] study the effect of auditor litigation risk on audit fees. Litigation risk is expected to be a strong incentive for auditors to deliver high quality audits and an important determinant of audit fees. Nevertheless, determining the impact of litigation risk is complicated because although there is considerable variation in audit fees, there are scarce opportunities to examine variation in litigation risk. This paper provides a brief summary of extant studies examining the effect of auditor litigation on audit fees, and discusses research design issues and future research opportunities in this area.
Author: Joginderpal Singh Kundi
Publisher:
ISBN:
Category : Auditing
Languages : en
Pages : 278
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Book Description
Author: Cory A. Cassell
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We investigate whether auditors are sensitive to litigation risk related specifically to having greater numbers of institutional investors that hold the common stock of a given client. Our findings suggest that audit fees are higher when the number of institutional investors holding stock in the company is greater. Additional tests corroborate our inference that the association between audit fees and the number of institutional investors is related to litigation risk. The importance of improving our understanding of auditors' sensitivity to factors that increase litigation exposure is highlighted by the number and magnitude of lawsuits filed against auditors relating to the audits of public clients.
Author: Michael W. Maher
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Previous research provides evidence that, for the clients of a large audit firm, audit clients with higher perceived business risk bear the expected costs of this risk with higher audit fees. We extend the literature, which focuses on the relation between litigation risk and audit fees, by examining alleged client misconduct that is not illegal but possibly increases business risk. In particular, we examine the relation between audit fees and business risk for audit clients doing business in developing countries where bribery of top government officials has been accepted business practice. We hypothesize that bribery-paying clients are riskier both because of client business risk and audit business risk. Using data collected from SEC filings and audit fee data in the 1970s, prior to the passage of the Foreign Corrupt Practices Act, we provide evidence that audit fees were higher for clients that disclosed paying bribes. This evidence is consistent with an audit market where auditors assess business risk at the client level, then pass its expected costs to the client in the form of higher audit fees.
Author: Jayanthi Krishnan
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Litigation against auditors has increased dramatically in recent years. Auditors can offset litigation risk in a number of ways, including improved audit quality and planning, increases in audit fees and increases in the issuance of modified opinions. Auditors can also adjust their client portfolios by becoming more selective in their choice of new clients and by withdrawing from high-risk engagements. We test the hypothesis that litigation risk motivates auditor resignations by comparing resignation companies with two groups of client companies that dismissed their auditors: one matched with the resignation companies on industry and year, and the other matched on year alone. We find resignation companies differ from dismissal companies along dimensions that capture the probability of litigation: financial distress, variance of abnormal returns, auditor independence, tenure and a modified (particularly going-concern) opinion. We also construct a litigation proxy based on a prior litigation-prediction model and find that the proxy is positively associated with the probability that the auditor will resign rather than be dismissed from the engagement. Our analysis is consistent with concerns expressed by the accounting profession that litigation pressures lead to the withdrawal of audit services for a segment of the market.
Author: Huan Yin
Publisher:
ISBN:
Category : Auditing
Languages : en
Pages : 70
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Book Description
Auditors assure the fairness of financial statements for company stakeholders. Audit effort to minimise errors leads to higher audit fees. The reduced audit fees in the United States cause company stakeholders' concern on audit quality. A reliable method used in other fields, Benford's Law, may assist auditors to identify errors from data manipulation and accounting irregularities. This research investigates whether using Benford's Law can reduce audit risk and improve audit outcomes, using a sample of U.S. companies between 2000 and 2014. I empirically examine whether the FSD_Score based on the Kolmogorov-Smirnoff statistic (maximum deviation between empirical digit distribution and Benford's Law distribution) and the mean absolute deviation is an important determinant of audit fees. Validation tests are conducted to test the conformity with Benford's Law in my samples. Audit fee models are used to investigate the association between FSD_Score and audit fees. Evidence from validation tests indicates that numbers in financial statements closely conform to Benford's Law. I find a negative and significant association between FSD_Score and audit fees, inconsistent with the hypothesis that audit fees increase with FSD_Score because high FSD_Scores reflect high litigation risks. I also find that the association between FSD_Score is stronger in smaller firms than in larger firms. Results from audit fee models and additional tests suggest that FSD_Score can be used as a measure of audit quality instead of litigation risk.
Author: Dan A. Simunic
Publisher:
ISBN:
Category :
Languages : en
Pages : 37
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Book Description
Author: Wm. Dennis Huber
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
The Sarbanes-Oxley Act of 2002 (SOX) was enacted to “protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws...” The Public Company Accounting Oversight Board (PCAOB) was created as part of SOX and given a duty to impose monetary sanctions on PCAOB registered accounting firms for intentional, knowing, or reckless conduct that results in violation of the statutory, regulatory, or professional standards of auditing, or for repeated instances of negligent conduct. This creates a new risk for both individual auditors and auditing firms separate and distinct from business, audit, and litigation risk -- sanction risk. This paper establishes the legal and economic bases of sanction risk and proposes that research be conducted to determine whether sanction-risk premiums are being incorporated into audit fees and passed on to clients by registered accounting firms thereby subverting the intended purpose of the sanctions.
