Premium
Audit Firm Attributes and Auditor Litigation Risk
Author(s) -
Kang Minjung,
Lee HoYoung,
Mande Vivek,
Woo YongSang
Publication year - 2019
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12171
Subject(s) - business , audit , accounting , litigation risk analysis , audit risk , joint audit , auditor independence , proxy (statistics) , audit evidence , chief audit executive , internal audit , inherent risk (accounting) , treasury , revenue , liability , finance , archaeology , machine learning , computer science , history
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.