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Auditor liability rules under imperfect information and costly litigation: the welfare-increasing effect of liability insurance

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  • Ralf Ewert
  • Eberhard Feess
  • Martin Nell

Abstract

This 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 Info

Article provided by Taylor & Francis Journals in its journal European Accounting Review.

Volume (Year): 9 (2000)
Issue (Month): 3 ()
Pages: 371-385

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Handle: RePEc:taf:euract:v:9:y:2000:i:3:p:371-385

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  1. Dye, Ronald A., 1995. "Incorporation and the audit market," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 75-114, February.
  2. Ralf Ewert, 1999. "Auditor Liability and the Precision of Auditing Standards," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 181-, March.
  3. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  4. Willekens, M. & Steele, A. & Miltz, D., 1996. "Audit standards and auditor liability: A theoretical model," Open Access publications from Tilburg University urn:nbn:nl:ui:12-375927, Tilburg University.
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Cited by:
  1. Ganuza, Juan Jose & Gomez, Fernando, 2007. "Should we trust the gatekeepers?: Auditors' and lawyers' liability for clients' misconduct," International Review of Law and Economics, Elsevier, vol. 27(1), pages 96-109, March.

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