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The Settlement Norm in Audit Legal Disputes: Insights from Prominent Attorneys$

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  • Eldar Maksymov
  • Jeffrey Pickerd
  • D. Jordan Lowe
  • Mark E. Peecher
  • Andrew Reffett
  • Dain C. Donelson

Abstract

Prior research indicates that most audit legal disputes settle. There is, however, little evidence of the factors that drive the settlement norm and its exceptions in audit legal disputes. To better understand these factors, we rely on theory related to how professionals manage risks and, as a result, how professions defend jurisdictional claims. We use this theoretical lens to help motivate four research questions that we probe by interviewing 27 prominent attorneys experienced in audit litigation. Consistent with our lens, our interview data indicate that attorneys manage their risks, including the risk of reputational loss, by settling based on their expectations of trial verdicts. Unlike trials, settlements simultaneously enable attorneys on both sides to limit costs and avoid catastrophic jury verdicts and, by doing so, claim “wins” for their clients. Attorneys also stress that they settle many audit disputes without any legal filings. Thus, a large subset of disputes is invisible to the public and researchers. Attorneys characterize trials as exceptions to the settlement norm that emerge due to abnormal conditions sometimes present in disputes. However, trial verdicts in these abnormal conditions help attorneys justify the use of settlements to clients, as attorneys stress that by settling they can avoid the dreaded possibility of extreme unfavorable verdicts. We conclude that as individual attorneys manage their risks, especially the risk of reputational loss, their profession maintains its public image and thereby defends its jurisdictional claims. Among the many questions we pose for future research is whether the settlement norm reduces society's ability to monitor the audit profession and, more generally, whether this norm's benefits outweigh its drawbacks. La norme du règlement des litiges en matière d'audit : l’éclairage d’éminents avocats Selon de précédentes études, la plupart des litiges en matière d'audit se soldent par un règlement. Rares sont toutefois les données relatives aux facteurs qui régissent la norme du règlement des litiges en matière d'audit et les cas d'exception. Pour mieux comprendre ces facteurs, les auteurs s'appuient sur la théorie en ce qui a trait à la façon dont les professionnels gèrent les risques et, partant, à celle dont les professions justifient leurs revendications de compétence. Ils adoptent cette perspective théorique pour mieux étayer quatre questions de recherche sur lesquelles ils se penchent en interviewant 27 éminents avocats, experts des litiges en matière d'audit. Conformément à l'optique choisie, les données qu'ils tirent de leurs entrevues indiquent que les avocats gèrent leurs risques, y compris le risque d'atteinte à leur réputation, en réglant les litiges selon leurs attentes quant au verdict du tribunal. À la différence des procès, les règlements permettent simultanément aux avocats des deux parties de limiter les coûts et d'éviter les verdicts désastreux du jury et, ce faisant, de déclarer leurs clients « vainqueurs ». Les avocats soulignent également qu'ils règlent de nombreux litiges en matière d'audit sans aucune poursuite judiciaire. Ainsi, un vaste sous‐ensemble de litiges demeurent invisibles aux yeux du public et des chercheurs. Les avocats voient les procès comme des exceptions à la norme du règlement résultant des conditions anormales que présentent parfois les litiges. Les verdicts des tribunaux dans ces conditions anormales aident néanmoins les avocats à justifier auprès des clients le choix du règlement, stratégie qui, font‐ils remarquer, évite auxdits clients le risque redouté d'un verdict extrêmement défavorable. Les auteurs concluent que, lorsque les avocats à titre individuel gèrent les risques auxquels ils sont exposés, en particulier le risque d'atteinte à leur réputation, leur profession entretient son image publique et, ce faisant, justifie ses revendications de compétence. Parmi les nombreuses questions qu'ils se posent quant à l'orientation des recherches futures, les auteurs se demandent si la norme du règlement réduit la possibilité pour la collectivité de contrôler la profession d'audit et, sous un angle plus large, si les avantages de cette norme excèdent ses inconvénients.

Suggested Citation

  • Eldar Maksymov & Jeffrey Pickerd & D. Jordan Lowe & Mark E. Peecher & Andrew Reffett & Dain C. Donelson, 2020. "The Settlement Norm in Audit Legal Disputes: Insights from Prominent Attorneys$," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1400-1443, September.
  • Handle: RePEc:wly:coacre:v:37:y:2020:i:3:p:1400-1443
    DOI: 10.1111/1911-3846.12569
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    References listed on IDEAS

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    1. Goodson, Brian M. & Grenier, Jonathan H. & Maksymov, Eldar, 2023. "When law students think like audit litigation attorneys: Implications for experimental research," Accounting, Organizations and Society, Elsevier, vol. 104(C).
    2. Friedrich, Christian & Quick, Reiner, 2024. "Do non-audit service failures impair auditor reputation? An analysis of KPMG advisory service scandals in Germany," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 98(C).
    3. Christine Gimbar & Molly Mercer, 2021. "Do Auditors Accurately Predict Litigation and Reputation Consequences of Inaccurate Accounting Estimates?," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 276-301, March.
    4. Chambers, Valerie A. & Reckers, Philip M.J. & Reinstein, Alan, 2020. "Drivers of juror's malpractice assessments in auditor litigation involving offshoring and overtime: Generation and a management Mindset," Advances in accounting, Elsevier, vol. 50(C).

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