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Auditor Experience and the Timeliness of Litigation Loss Contingency Disclosures

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  • Feng Chen
  • Yu Hou
  • Gordon Richardson
  • Minlei Ye

Abstract

This paper hypothesizes and finds that firms audited by city‐industry specialists have more timely disclosures of contingent losses from litigation when there is no news coverage relating to the legal case prior to management disclosures. A closer examination reveals that this result is explained by the specialist auditors’ prior experience auditing clients in the same office and industry who are involved with litigation. In our setting, disclosures of litigation‐related contingent losses, we identify two kinds of knowledge generated from experience: industry knowledge and litigation knowledge. Industry knowledge helps auditors detect and correct poor implementation of guidance for litigation loss contingency disclosures. Auditors gain litigation knowledge from auditing clients in a given office and industry with previous involvement as defendants. Thus, the two types of knowledge interact in their effects on reporting outcomes. Les auteurs posent et démontrent l'hypothèse selon laquelle les sociétés dont l'audit est assuré par des auditeurs d'un même bureau (local) qui sont des spécialistes d'un secteur d'activité communiquent plus rapidement l'information relative aux pertes éventuelles découlant d'un litige lorsque le litige en question n'est pas médiatisé avant la publication d'information par la direction. Un examen plus attentif indique que cette observation s'explique par l'expérience préalable que possèdent les auditeurs spécialisés dans l'audit de clients du même bureau et appartenant au même secteur qui ont été parties à un litige. Dans le contexte de l’étude, celui de la communication de l'information relative aux pertes éventuelles découlant d'un litige, les auteurs définissent deux types de connaissance tirée de l'expérience : la connaissance du secteur et la connaissance des litiges. La connaissance du secteur aide les auditeurs à déceler les déficiences dans l'application des directives en matière de communication d'information relative aux pertes éventuelles découlant de litiges et à y remédier. Les auditeurs acquièrent leur connaissance des litiges auprès de leurs clients d'audit, d'un bureau et d'un secteur donnés, qui ont déjà été parties à des poursuites. Ces deux types de connaissance interagissent dans leurs répercussions sur l'information financière.

Suggested Citation

  • Feng Chen & Yu Hou & Gordon Richardson & Minlei Ye, 2018. "Auditor Experience and the Timeliness of Litigation Loss Contingency Disclosures," Contemporary Accounting Research, John Wiley & Sons, vol. 35(2), pages 956-979, June.
  • Handle: RePEc:wly:coacre:v:35:y:2018:i:2:p:956-979
    DOI: 10.1111/1911-3846.12398
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    Cited by:

    1. Fangjun Wang & Luying Xu & Fei Guo & Junrui Zhang, 2020. "Loan Guarantees, Corporate Social Responsibility Disclosure and Audit Fees: Evidence from China," Journal of Business Ethics, Springer, vol. 166(2), pages 293-309, October.
    2. Jere R. Francis & Wei Wang, 2021. "Common Auditors and Private Bank Loans," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 793-832, March.
    3. Dan Dacian Cuzdriorean, 2018. "Auditing Research: A Review Of Recent Research Advances," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 6(4), pages 14-26.
    4. Ting Zhang & So Yean Kwack & Yi Si & Gaoliang Tian, 2023. "Non‐GAAP earnings reporting following going‐concern opinions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3217-3252, September.

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