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Litigation Risk and Auditor Conservatism: A UK-US Comparison

Li, Shaling and Beekes, W A and Peasnell, K V (2009) Litigation Risk and Auditor Conservatism: A UK-US Comparison. Working Paper. The Department of Accounting and Finance, Lancaster University.

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    Abstract

    This paper investigates the association between auditor quality and the level of conservatism in reported earnings. Prior work has suggested auditor conservatism is influenced by auditors’ desire to prevent litigation and/or incurring reputational costs. To tease out the relative importance of the litigation versus reputational concerns of large audit firms as reasons for greater auditor conservatism, we conduct a comparative study for UK and US firms. In contrast to the US, the UK is a comparatively low litigation environment. Our results show that (1) large auditors are not associated with greater conservatism after the clients’ level of financial distress has been taken into account in the two countries; (2) the client profiles of large and small audit firms differ in key dimensions and these play a significant role in determining the incremental influence of audit firm size on the earnings conservatism of their clients. Therefore, rather than auditor quality driving the level of earnings conservatism, it appears to be the case that it is the underlying client characteristics which dictate the level of auditor conservatism. Failure to allow for such differences can result in misleading inferences being drawn about the effects of audit firm size on earnings conservatism.

    Item Type: Monograph (Working Paper)
    Uncontrolled Keywords: Big-Five Auditors ; Earnings Conservatism ; Earnings Timeliness ; Litigationtheory ; Reputation theory
    Subjects: UNSPECIFIED
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 48974
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 22:26
    Refereed?: No
    Published?: Published
    Last Modified: 09 Aug 2012 10:42
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/48974

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