Auditor liability rules under imperfect information and costly litigation: the welfare-increasing effect of liability insurance
AbstractThis paper examines auditor liability rules under imperfect information, costly litigation and risk-averse auditors. A negligence rule fails in such a setting, because in equilibrium auditors will deviate with positive probability from any given standard. It is shown that strict liability outperforms negligence with respect to risk allocation and the probability that a desired level of care is met by the auditor if competitive liability insurance markets exist. Furthermore, our model explains the existence of insurance contracts containing obligations a type of contract often observed in liability insurance markets.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal European Accounting Review.
Volume (Year): 9 (2000)
Issue (Month): 3 ()
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