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Article
Publication date: 30 June 2020

Thanyawee Pratoomsuwan and Orapan Yolrabil

This study examines the effects of key audit matter (KAM) disclosures in auditors' reports on auditor liability in cases of fraud and error misstatements using evaluators with…

1193

Abstract

Purpose

This study examines the effects of key audit matter (KAM) disclosures in auditors' reports on auditor liability in cases of fraud and error misstatements using evaluators with audit experience.

Design/methodology/approach

The experiment is conducted using 174 professional auditors as participants.

Findings

The participating auditors assess higher auditor liability when misstatements are related to errors rather than when they are related to fraud. In addition, the results also demonstrate that KAM disclosures reduce auditor liability only in cases of fraud and not in cases of errors. Together, the results support the view that KAM reduces the negative affective reactions of evaluators, which in turn, reduce the assessed auditor liability.

Research limitations/implications

This study did not analyze the setting in which auditors who act as peer evaluators had an opportunity to discuss the case among their peers, which may have affected their judgments.

Practical implications

The results of KAM disclosures on auditor liability in cases of error and fraud misstatements inform auditors that, different from the auditors' concern that disclosing KAM may increase auditors' legal risk, it tends to decrease or at least have no impact on the liability judgment.

Originality/value

This study contributes to the accounting literature by adding findings on another aspect of KAM in different audit settings, particularly, in the Thai legal environment with different types of undetected misstatements. The current conflicting results on how KAM disclosures affect auditor liability warrant further investigation of this issue in other audit contexts in different countries.

Details

Journal of Applied Accounting Research, vol. 21 no. 4
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 1 June 1996

C. Richard Baker and Reiner Quick

Compares auditors’ legal liability to third parties in several major countries, with principal emphasis on comparisons between the USA and the UK. Public accountants claim that…

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Abstract

Compares auditors’ legal liability to third parties in several major countries, with principal emphasis on comparisons between the USA and the UK. Public accountants claim that they are being adversely affected by lawsuits brought by shareholders, creditors and other third parties. It has been asserted, without any specific evidence, that increased exposure to legal liability has caused public accounting firms to cease the practice of auditing or go out of business entirely. Details auditors’ legal liability to third parties in the USA and Europe and, in particular, the UK. Concludes by reviewing certain positions taken by the Fédération des Experts Comptables Européens with respect to auditors’ legal liability in the face of European economic and political union.

Details

European Business Review, vol. 96 no. 3
Type: Research Article
ISSN: 0955-534X

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Article
Publication date: 1 March 2001

Gregory Shailer, Roger Willett, Kim Len Yap and Margo Wade

This paper investigates the perceptions of senior auditors in large firms in Australia, Malaysia and New Zealand concerning sources of auditor legal liability, what should…

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Abstract

This paper investigates the perceptions of senior auditors in large firms in Australia, Malaysia and New Zealand concerning sources of auditor legal liability, what should constitute auditors’ duties and what may be done to reduce litigation exposure. Results are consistent with our conjecture that professional and organisational culture dominates perceptions, even in the presence of quite strong jurisdictional, cultural and institutional differences. The analysis indicates that auditors’ perceptions are strongly affected by international trends, while cultural and institutional effects tend to be more subtle but are identified by detailed and focused analysis.

Details

Managerial Auditing Journal, vol. 16 no. 2
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 November 2000

Carl Pacini, William Hillison and David Sinason

Examines the legal environment of the UK, Canada, Australia, New Zealand and the USA with respect to auditor liability. Provides an understanding of the legal risks to accountants…

3950

Abstract

Examines the legal environment of the UK, Canada, Australia, New Zealand and the USA with respect to auditor liability. Provides an understanding of the legal risks to accountants associated with third‐party uses of audited financial statements by contrasting accounting liability for negligent misrepresentation in various US settings with those of the four other nations. Liability pressure has been very acute and litigation in the five countries has increased. Evidence supports a trend towards limiting third‐party liability to accountants.

Details

Managerial Auditing Journal, vol. 15 no. 8
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 June 1993

Stephen C. Yam and Phoebe W. Yam

The Hong Kong Society of Accountants proposes to allowincorporating audit practices in Hong Kong. Finds that auditors areanxious about their increasing risk and the legal…

Abstract

The Hong Kong Society of Accountants proposes to allow incorporating audit practices in Hong Kong. Finds that auditors are anxious about their increasing risk and the legal liabilities of their work, believing that incorporation is the best method to protect their interests. Many auditors believe that the profession should place the public interests at the top but the interests of the profession should also be protected. Therefore incorporation of the audit practice is necessary in Hong Kong, but strict rules should be imposed to prevent abuse. In addition, finds that clients are not concerned about this issue. The bankers will give a lower value to the audited financial statements issued by incorporated audit firms. In implementation, the professional indemnity insurance and the minimal capital requirement will become the key concern of auditors to incorporate their audit firms.

Details

Managerial Auditing Journal, vol. 8 no. 6
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 14 April 2023

Yanghui Liu, Jeff Zeyun Chen, Wuchun Chi and Xiaohai Long

This paper aims to investigate the relation between audit firms’ switch to limited liability partnership (LLP) from limited liability company (LLC) and client firms’ earnings…

Abstract

Purpose

This paper aims to investigate the relation between audit firms’ switch to limited liability partnership (LLP) from limited liability company (LLC) and client firms’ earnings comparability. If LLP auditors, who have a higher liability exposure than LLC auditors, are more consistent in implementing generally accepted accounting principles and executing firm-wide audit methodologies, client firms’ earnings comparability will increase.

Design/methodology/approach

Using data from China, the authors examine whether client firm-pairs of LLP auditors have higher earnings comparability than client firm-pairs of LLC auditors. The authors also perform cross-sectional tests to shed light on the mechanisms through which auditors’ litigation exposure affects client firms’ comparability.

Findings

The authors find that firm-pairs in which both firms are audited by LLP auditors exhibit higher earnings comparability than other firm-pairs. This result is stronger when client firms are audited by the same auditor, when client firms are audited by the top 10 auditors and when the auditors are less dependent on the client firms. The authors also document that firm-pairs in which both firms are audited by LLP auditors have lower average analyst earnings forecast error and forecast dispersion.

Originality/value

To the best of the author’s knowledge, this study is the first to examine the relation between auditor’s litigation exposure and client firms’ earnings comparability. It also extends the literature on audit firm organizational form and audit quality.

Details

Managerial Auditing Journal, vol. 38 no. 5
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 1 June 1997

Xu Zhengdan, Xie Rong and Hu Chunyuan

Believes that the rapid development of the market system in the People’s Republic of China should encourage Chinese certified public accountants (CPAs) to examine themselves and…

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Abstract

Believes that the rapid development of the market system in the People’s Republic of China should encourage Chinese certified public accountants (CPAs) to examine themselves and recognize the importance of exercising due professional care, in order to develop in an international and healthy manner. Because the time of reconstructing the CPAs system in China is short, most attention is paid to how the CPAs profession can develop rapidly and to general professional management. However, the lack of consciousness of what “due care” is and what comprises the legal standards of due care contributes to confusion about its role. Feels that in order to promote the consciousness of audit liability, the law needs perfecting, and technical standards, audit theory, and court procedures need improvement before resolution of the auditorsliability issue can be achieved.

Details

Managerial Auditing Journal, vol. 12 no. 4/5
Type: Research Article
ISSN: 0268-6902

Keywords

Book part
Publication date: 8 August 2014

Andrew Reffett

Commentators express concern that when auditors investigate for but fail to detect fraud, jurors might effectively penalize the auditors for having investigated for the fraud…

Abstract

Commentators express concern that when auditors investigate for but fail to detect fraud, jurors might effectively penalize the auditors for having investigated for the fraud (AICPA, 2004; Coffee, 2004; Golden, Skalak, & Clayton, 2006). Consistent with these concerns, Reffett (2010) finds that, in a between-participants setting, evaluators in cases of undetected fraud are more likely to hold auditors liable for damages when the auditors identified the perpetrated fraud as a fraud risk and then investigated for the fraud, relative to when the auditors did neither. What remains unclear, however, is the extent to which identifying versus investigating fraud risks increases evaluators’ between-participants assessments of auditor liability. That is, when auditors investigate for, but fail to detect fraud, is the increase in evaluators’ liability assessments due to the fact that the auditors identified (i.e., were aware of) the fraud risk but did not detect the fraud, or that the auditors unsuccessfully investigated for the fraud (or both)? This study addresses these questions by reporting evidence that both identifying and investigating fraud risks can each, in isolation, increase evaluators’ perceptions of auditor negligence. The processes by which identifying and investigating fraud risks increase evaluators’ negligence verdicts, however, appear to differ.

Details

Advances in Accounting Behavioral Research
Type: Book
ISBN: 978-1-78190-838-9

Keywords

Article
Publication date: 9 December 2022

Qianqun Ma, Jianan Zhou and Qi Wang

Using China’s key audit matters (KAMs) data, this study aims to examine whether negative press coverage alleviates boilerplate KAMs.

Abstract

Purpose

Using China’s key audit matters (KAMs) data, this study aims to examine whether negative press coverage alleviates boilerplate KAMs.

Design/methodology/approach

This study uses Levenshtein edit distance (LVD) to calculate the horizontal boilerplate of KAMs and investigates how boilerplate changes under different levels of the perceived legal risk.

Findings

The findings indicate that auditors of firms exposed to substantial negative press coverage will reduce the boilerplate of KAMs. This association is more significant for auditing firms with lower market share and client firms with higher financial distress. Additionally, the authors find that negative press coverage is more likely to alleviate the boilerplate disclosure of KAMs related to managers’ subjective estimation and material transactions and events. Furthermore, the association between negative press coverage and boilerplate KAMs varies with the source of negative news.

Originality/value

The findings suggest that upon exposure to negative press coverage, reducing the boilerplate of KAMs has a disclaimer effect for auditors.

Details

Managerial Auditing Journal, vol. 38 no. 4
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 12 April 2022

James C. Hansen, Susan M. Murray, Sang Hyun Park and Nari Shin

This study aims to examine the effect of state-level legal risk on audit fee pricing in the USA. This study hypothesizes that auditors are more likely to charge higher audit fees…

Abstract

Purpose

This study aims to examine the effect of state-level legal risk on audit fee pricing in the USA. This study hypothesizes that auditors are more likely to charge higher audit fees to clients headquartered in states with higher legal risk in terms of probability of being sued, expected size of damages allocated to the auditors and breadth of third parties able to claim damages.

Design/methodology/approach

This study hypothesizes that higher state-level legal risk leads to higher audit fees. To test this, this study estimates ordinary least squares regressions of audit fees for 56,576 company years from 2001 to 2018 with the three measures of state legal risk and other factors known to affect audit fees.

Findings

This study finds that state-level legal risk is positively associated with audit fee pricing for two of three measures. Interestingly, the third measure, breadth of third parties able to claim damages, is negatively associated with audit fees.

Originality/value

To the best of the authors’ knowledge, this paper fulfills an identified need and is the first study to comprehensively test the association between state-level differentials in legal risk and audit fees.

Details

Managerial Auditing Journal, vol. 37 no. 5
Type: Research Article
ISSN: 0268-6902

Keywords

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