Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

Litigation Risk and Auditor Resignations

Jagan Krishnan and Jayanthi Krishnan
The Accounting Review
Vol. 72, No. 4 (Oct., 1997), pp. 539-560
Stable URL: http://www.jstor.org/stable/248174
Page Count: 22
  • Subscribe ($19.50)
  • Cite this Item
Litigation Risk and Auditor Resignations
Preview not available

Abstract

Litigation against auditors has increased dramatically in recent years. Auditors can offset litigation risk in a number of ways, including improved audit quality and planning, increases in audit fees and increases in the issuance of modified opinions. Auditors can also adjust their client portfolios by becoming more selective in their choice of new clients and by withdrawing from high-risk engagements. We test the hypothesis that litigation risk motivates auditor resignations by comparing resignation companies with two groups of client companies that dismissed their auditors: one matched with the resignation companies on industry and year, and the other matched on year alone. We find resignation companies differ from dismissal companies along dimensions that capture the probability of litigation: financial distress, variance of abnormal returns, auditor independence, tenure and a modified (particularly going-concern) opinion. We also construct a litigation proxy based on a prior litigation-prediction model and find that the proxy is positively associated with the probability that the auditor will resign rather than be dismissed from the engagement. Our analysis is consistent with concerns expressed by the accounting profession that litigation pressures lead to the withdrawal of audit services for a segment of the market.

Page Thumbnails

  • Thumbnail: Page 
539
    539
  • Thumbnail: Page 
540
    540
  • Thumbnail: Page 
541
    541
  • Thumbnail: Page 
542
    542
  • Thumbnail: Page 
543
    543
  • Thumbnail: Page 
544
    544
  • Thumbnail: Page 
545
    545
  • Thumbnail: Page 
546
    546
  • Thumbnail: Page 
547
    547
  • Thumbnail: Page 
548
    548
  • Thumbnail: Page 
549
    549
  • Thumbnail: Page 
550
    550
  • Thumbnail: Page 
551
    551
  • Thumbnail: Page 
552
    552
  • Thumbnail: Page 
553
    553
  • Thumbnail: Page 
554
    554
  • Thumbnail: Page 
555
    555
  • Thumbnail: Page 
556
    556
  • Thumbnail: Page 
557
    557
  • Thumbnail: Page 
558
    558
  • Thumbnail: Page 
559
    559
  • Thumbnail: Page 
560
    560