To read the full version of this content please select one of the options below:

Litigation against clients and audit report lag: an examination of the role of state ownership and regional legal development in China

Hui Liu (School of Management, Northwestern Polytechnical University, Xi’an, China)
Charles Cullinan (College of Business, Bryant University, Smithfield, Rhode Island, USA)
Junrui Zhang (School of Management, Xi’an Jiaotong University, Xi’an, China)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 12 July 2021

Issue publication date: 10 August 2021

221

Abstract

Purpose

Companies may be defendants in lawsuits that are unresolved at year-end. This paper aims to consider whether the financial statements of companies facing litigation claims (pending litigation) are more time-consuming to audit due to the complexity and subjectivity of contingent liabilities associated with pending litigation. The authors consider whether auditors tailor their approach to pending litigation based on two distinct factors in the Chinese business environment: the client’s government ownership status and the legal development of the region in which the company is based.

Design/methodology/approach

Data on litigation against companies and their audit report lags were obtained for 18,029 firm-year observations of Chinese companies from 2008 to 2017. The sample was subsequently divided based on whether the company was a state-owned enterprise (SOE) and based on whether the company was based in a region of China with a more-developed and more market-oriented legal system.

Findings

The overall results indicate that audits of companies with pending litigation take 2.9 days longer than those of companies without pending litigation. For companies with multiple pending claims, each additional claim is associated with 1.9 more days of audit report lag. These effects are weaker for SOEs and for companies in regions of China with less developed legal systems. The results are consistent with the idea that auditors tailor their response to pending litigation based on the risk profile of the client, including consideration of SOE status and regional legal development.

Originality/value

This paper is the first to consider the potential effect of pending litigation (including claims not disclosed or recognized in financial statements) on audit report lags and how environmental business factors can influence this relationship.

Keywords

Acknowledgements

The authors gratefully acknowledge helpful comments received on this paper from participants at the 2020 American Accounting Association Auditing Section Meeting.

Funding: Hui Liu and Junrui Zhang are thankful for the financial support of the National Natural Sciences Foundation of China (Grant No. 72002171 and 72072143).

Citation

Liu, H., Cullinan, C. and Zhang, J. (2021), "Litigation against clients and audit report lag: an examination of the role of state ownership and regional legal development in China", Managerial Auditing Journal, Vol. 36 No. 5, pp. 744-769. https://doi.org/10.1108/MAJ-02-2020-2557

Publisher

:

Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

Related articles