Conservative Accounting, Audit Quality, and Litigation

• 成果类型: Article
• 署名作者: Kronenberger, Sebastian; Laux, Volker
• 署名单位: University of Mannheim; University of Texas System; University of Texas Austin
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2021.3971
• 发表日期: 2022
• 页码: 2349-2362
• 关键词: conservative accounting; LITIGATION; Audit quality

摘要

Investors are much more likely to sue corporations and their auditors for overstated earnings reports than for understated reports. This asymmetry in litigation exposure is viewed as an important driver for conservative accounting practices in corporations because conservatism reduces the probability of overstatements and hence, investor litigation. This argument is incomplete, however, because it ignores that litigation concerns also affect the incentives of the auditor, which, in turn, affect the firm's optimal reporting system. We find that the threat of litigation encourages firms to report more conservatively only when the auditor's cost of detecting misstatements is relatively high but promotes less conservative reporting when the auditor's cost of auditing is low.