Do going concern audit reports protect auditors from litigation? A simultaneous equations approach

Steven Kaplan, David D. Williams

Research output: Contribution to journalArticlepeer-review

53 Scopus citations

Abstract

Audit researchers have a long-standing interest in understanding whether issuing a going concern report to financially stressed clients protects auditors from litigation. An endogeneity issue arises, in that litigation risk affects the going concern decision and the going concern decision impacts auditor litigation risk. Using a simultaneous equations approach, we find a significant positive association between auditors' ex ante litigation risk and going concern reporting. By applying simultaneous equations, we also find a significant negative association between going concern reporting and auditor litigation, suggesting that auditors deter lawsuits by issuing going concern reports to their financially stressed clients. Our research further provides a more rigorous analysis of the relation between going concern reporting and lawsuit outcomes in the form of auditor litigation dismissals, small settlement amounts, and large settlement amounts. Our results indicate that when auditors are named in lawsuits, having issued a going concern report reduces the likelihood of large financial settlements.

Original languageEnglish (US)
Pages (from-to)199-232
Number of pages34
JournalAccounting Review
Volume88
Issue number1
DOIs
StatePublished - Jan 1 2013

Keywords

  • Audit reports
  • Auditor litigation
  • Auditor litigation settlements

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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