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Auditing Standards, Legal Liability, and Auditor Wealth

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  • Dye, Ronald A
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    Abstract

    There has been an enormous increase in auditing and accounting standards and in litigation against auditors. This paper examines some of the consequences of these changes by developing a model of the audit market relating auditors' liability to auditing standards. The paper demonstrates how equilibrium audit fees depend on both the informational value of the audit and the option value of the claim financial statement users have on the auditor's wealth in the event the audit is determined to have been substandard. Auditors' attitudes toward and responses to auditing standards are studied, and characteristics of optimal liability rules are evaluated. Copyright 1993 by University of Chicago Press.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Political Economy.

    Volume (Year): 101 (1993)
    Issue (Month): 5 (October)
    Pages: 887-914

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    Handle: RePEc:ucp:jpolec:v:101:y:1993:i:5:p:887-914

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    Web page: http://www.journals.uchicago.edu/JPE/

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    Cited by:
    1. Giovanni Immordino & Marco Pagano, 2005. "Optimal Regulation of Auditing," CSEF Working Papers 133, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 May 2007.
    2. Jevons Lee, Chi-Wen & Liu, Chiawen & Wang, Taychang, 1999. "The 150-hour rule," Journal of Accounting and Economics, Elsevier, vol. 27(2), pages 203-228, April.
    3. Dennis M. O'Reilly, 2010. "Do investors perceive the going-concern opinion as useful for pricing stocks?," Managerial Auditing Journal, Emerald Group Publishing, vol. 25(1), pages 4-16, January.
    4. Guedhami, Omrane & Pittman, Jeffrey A. & Saffar, Walid, 2009. "Auditor choice in privatized firms: Empirical evidence on the role of state and foreign owners," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 151-171, December.
    5. Chi, Wuchun & Wang, Chenchin, 2010. "Accounting conservatism in a setting of Information Asymmetry between majority and minority shareholders," The International Journal of Accounting, Elsevier, vol. 45(4), pages 465-489, December.
    6. Lennox, Clive & Li, Bing, 2014. "Accounting misstatements following lawsuits against auditors," Journal of Accounting and Economics, Elsevier, vol. 57(1), pages 58-75.
    7. Andrew McLennan & In-Uck Park, 2003. "The Market for Liars: Reputation and Auditor Honesty," ISER Discussion Paper 0587, Institute of Social and Economic Research, Osaka University.
    8. Napier, Christopher J., 1998. "Intersections of law and accountancy: Unlimited auditor liability in the United Kingdom," Accounting, Organizations and Society, Elsevier, vol. 23(1), pages 105-128, January.
    9. Numata, Shingo & Takeda, Fumiko, 2010. "Stock market reactions to audit failure in Japan: The case of Kanebo and ChuoAoyama," The International Journal of Accounting, Elsevier, vol. 45(2), pages 175-199, June.
    10. Ashbaugh-Skaife, Hollis & Collins, Daniel W. & Kinney Jr., William R., 2007. "The discovery and reporting of internal control deficiencies prior to SOX-mandated audits," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 166-192, September.
    11. Hope, Ole-Kristian & Langli, John Christian & Thomas, Wayne B., 2012. "Agency conflicts and auditing in private firms," Accounting, Organizations and Society, Elsevier, vol. 37(7), pages 500-517.
    12. John, Kose & John, Teresa A., 2006. "Managerial incentives, derivatives and stability," Journal of Financial Stability, Elsevier, vol. 2(1), pages 71-94, April.
    13. Lennox, Clive & Li, Bing, 2012. "The consequences of protecting audit partners’ personal assets from the threat of liability," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 154-173.
    14. Dye, Ronald A., 1995. "Incorporation and the audit market," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 75-114, February.
    15. Mohd Hassan Che Haat & Rashidah Abdul Rahman & Sakthi Mahenthiran, 2008. "Corporate governance, transparency and performance of Malaysian companies," Managerial Auditing Journal, Emerald Group Publishing, vol. 23(8), pages 744-778, September.
    16. Jaggi, Bikki & Low, Pek Yee, 2011. "Joint Effect of Investor Protection and Securities Regulations on Audit Fees," The International Journal of Accounting, Elsevier, vol. 46(3), pages 241-270, September.
    17. Ball, Ray & Jayaraman, Sudarshan & Shivakumar, Lakshmanan, 2012. "Audited financial reporting and voluntary disclosure as complements: A test of the Confirmation Hypothesis," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 136-166.
    18. Forster, Josef, 2008. "The Optimal Regulation of Credit Rating Agencies," Discussion Papers in Economics 5169, University of Munich, Department of Economics.
    19. Caramanis, Constantinos & Lennox, Clive, 2008. "Audit effort and earnings management," Journal of Accounting and Economics, Elsevier, vol. 45(1), pages 116-138, March.
    20. Louis-Philippe Sirois & Sophie Marmousez & Dan Simunic, 2012. "Big 4 and non-Big 4 Audit Production Costs: Office Level Audit Technology and the Impact on Audit Fees," Post-Print hal-00691147, HAL.
    21. Chang, Xin & Dasgupta, Sudipto & Hilary, Gilles, 2005. "The Effect of Auditor Choice on Financing Decisions," CEI Working Paper Series 2005-10, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    22. Tom Van Caneghem, 2010. "Audit pricing and the Big4 fee premium: evidence from Belgium," Managerial Auditing Journal, Emerald Group Publishing, vol. 25(2), pages 122-139, February.
    23. Mehmet Ünsal Memis & Emin Hüseyin Cetenak, 2012. "Earnings Management, Audit Quality and Legal Environment: An International Comparison," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 460-469.

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