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When Are Audit Firms Sued for Financial Reporting Failures and What Are the Lawsuit Outcomes?

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  • Clive Lennox
  • Bing Li

Abstract

We examine how often audit firms are sued in a large sample of accounting lawsuits that allege financial reporting failures. We find an insignificant relation between the likelihood of auditor litigation and restatements, but the likelihood of auditor litigation is strongly related to the types of alleged accounting deficiencies. We also find that the auditor's type influences the probability of the auditor being sued and the size of the payouts from auditor and nonauditor defendants. In particular, the Big N firms are approximately 7 percent less likely than non–Big N firms to be named as co‐defendants, and the auditor's contribution to the plaintiff's payout is significantly larger when a Big N firm is sued. Overall, our findings suggest that auditors are rarely blamed when there are allegations of financial reporting failures, but the types of accounting deficiencies and the auditor's type significantly influence the probability of the audit firm being sued and the outcomes of the lawsuits. Quand les cabinets d'audit sont‐ils poursuivis en justice pour des erreurs sur le plan de la présentation de l'information financière et quelle est l'issue de ces poursuites? À l'aide d'un vaste échantillon de poursuites dans le secteur comptable alléguant des erreurs sur le plan de la présentation de l'information financière, nous examinons à quelle fréquence les cabinets d'audit font l'objet de poursuites judiciaires. Nous faisons état d'une corrélation non significative entre la probabilité de litiges mettant en cause des auditeurs et les retraitements, mais la probabilité de tels litiges est étroitement associée aux types d'erreurs comptables alléguées. Nous établissons également que le type d'auditeur influence la probabilité de poursuite et le montant des règlements versés par les défendeurs, qu'ils soient des auditeurs ou non. Plus particulièrement, les cabinets du Big N sont environ 7 % moins susceptibles que ceux n'appartenant pas au Big N d’être désignés comme codéfendeurs, et la contribution de l'auditeur au versement effectué au plaignant est considérablement plus élevée lorsqu'une poursuite vise un cabinet du Big N. Globalement, nos résultats laissent entendre que les auditeurs sont rarement tenus responsables en cas d'allégations d'erreurs sur le plan de la présentation de l'information financière, mais que le type d'erreur comptable et le type d'auditeur influencent de façon importante la probabilité qu'un cabinet d'audit soit poursuivi en justice ainsi que l'issue de ces poursuites.

Suggested Citation

  • Clive Lennox & Bing Li, 2020. "When Are Audit Firms Sued for Financial Reporting Failures and What Are the Lawsuit Outcomes?," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1370-1399, September.
    • Handle: RePEc:wly:coacre:v:37:y:2020:i:3:p:1370-1399
    DOI: 10.1111/1911-3846.12571
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    References listed on IDEAS

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    1. Clive Lennox & Jeffrey A. Pittman, 2010. "Big Five Audits and Accounting Fraud," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 6-6, March.
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    4. Marcus M. Doxey & James G. Lawson & Thomas J. Lopez & Quinn T. Swanquist, 2021. "Do Investors Care Who Did the Audit? Evidence from Form AP," Journal of Accounting Research, Wiley Blackwell, vol. 59(5), pages 1741-1782, December.

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