Document Type

Article

Publication Date

2011

Publication Title

Managerial Auditing Journal

Volume

26

Issue

4

First Page

300

Last Page

316

DOI

10.1108/02686901111124639

Keywords

Risk management, Experimental/theoretical, United States--US, United States, Business And Economics--Management, Auditing

Abstract

The purpose of this paper is to examine whether client-specific litigation risk affects the audit quality differentiation between Big N and non-Big N auditors. Specifically, the authors examine whether higher quality audits of Big N auditors relative to non-Big auditors is more pronounced for clients with high litigation risk than for clients with low litigation risk. The authors develop the hypothesis based on auditors' potential monetary and reputational losses, collect the data of US listed companies from the Compustat and CRSP databases, and conduct regression analyses. The authors find that the higher effectiveness of Big N auditors over non-Big N auditors in constraining earning management is greater for high litigation risk clients than for low litigation risk clients, suggesting that clients' high litigation risk can force big auditors to perform more effectively. This paper contributes to the literature by providing novel evidence on the effect of client-specific litigation risk on the audit quality differentiation between Big N and non-Big N auditors. The authors' findings complement the extant research on the relationship between the audit quality differentiation and country-level litigation risk.

Comments

The article available for download is a post print. The definitive version is published in the Managerial Auditing Journal. It can be found here.

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