Financial reporting quality and audit firms’ past experiences of litigation.
Date of Issue2012
College of Business (Nanyang Business School)
This study investigates whether financial reporting quality is affected by an audit firm’s experience of litigation in the recent past. I find that the likelihood of an accounting misstatement and the magnitudes of misstatements are significantly lower for non-Big 4 auditors who recently suffered high litigation compared with non-Big 4 auditors who did not. In addition, I find an improvement in financial reporting quality subsequent to Big 4 auditors’ recent litigation experiences when the analysis is conducted at the audit office level. These results are consistent with my prediction that litigation has a disciplinary effect on auditors and leads to higher financial reporting quality.