Relative Liability Exposure for Negligence and Financial Reporting Quality: Evidence from the Audit Interference Rule

• 成果类型: Article
• 署名作者: Mayberry, Michael A.; Park, Hyun Jong; Zhang, Wei
• 署名单位: State University System of Florida; University of Florida; Pennsylvania Commonwealth System of Higher Education (PCSHE); Temple University; University of Massachusetts System; University of Massachusetts Amherst
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/TAR-2021-0757
• 发表日期: 2024
• 页码: 339-366
• 关键词: Litigation risk; CONSEQUENCES; fees; determinants; disclosure; services; Managers; REGIMES; demand; IMPACT

摘要

We examine how the shifting of legal liability between auditors and clients affects financial reporting quality. We exploit the state-level adoption and rejection of a common law doctrine, the Audit Interference Rule (AIR), which shifts legal liability between auditors and clients, while not affecting total legal liability. The likelihood of restatements declines following staggered rejections of the AIR that shift risk to clients. Path analysis indicates that audit fees increase following AIR rejections, suggesting that relatively greater liability exposure for clients leads to a greater demand for assurance services that, in turn, reduces the likelihood of restatements. We further find greater improvements in financial reporting quality following the rejections of the AIR among clients with higher litigation risk and larger clients. Broadly, we provide novel evidence that clients' incentives relating to increased liability exposure appear to dominate auditors' disincentives relating to decreased liability exposure on financial reporting quality.