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Audit Firm Attributes and Auditor Litigation Risk

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  • Minjung Kang
  • Ho‐Young Lee
  • Vivek Mande
  • Yong‐Sang Woo

Abstract

This study examines the association between auditors' litigation risk and audit firm attributes. Using professional liability insurance premiums as a proxy for auditors' litigation risk, we present evidence that the risk is lower in audit firms having: (1) separate non‐audit and audit divisions; (2) a higher proportion of partners; and (3) a higher annual growth in number of CPAs employed. Additionally, we find that the risk is higher in audit firms having: (1) operating losses; and (2) high revenue growth. Our results are consistent with the idea that audit firms' financial condition and organizational structure affect their independence/ expertise, and, in turn, their litigation risk. Our results are broadly supportive of the PCAOB's (2015) and US Department of Treasury's (2008) views that investors, audit committees, management, and other regulators could benefit from having access to financial and organizational information about audit firms.

Suggested Citation

  • Minjung Kang & Ho‐Young Lee & Vivek Mande & Yong‐Sang Woo, 2019. "Audit Firm Attributes and Auditor Litigation Risk," Abacus, Accounting Foundation, University of Sydney, vol. 55(4), pages 639-675, December.
    • Handle: RePEc:bla:abacus:v:55:y:2019:i:4:p:639-675
    DOI: 10.1111/abac.12171
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    Cited by:

    1. Riyadh Jassim AL Abdullah & Mawih Kareem AL Ani, 2021. "The impacts of interaction of audit litigation and ownership structure on audit quality," Future Business Journal, Springer, vol. 7(1), pages 1-14, December.

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