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The Effect of Alternative Judicial Systems and Settlement on Auditing

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  • Reed Smith

    (University of Oregon)

  • Donald Tidrick

    (University of Oregon)

Abstract

The accounting profession claims that the substantial litigation costs incurred to defend against negligence claims are used by plaintiffs to coerce settlement. We examine a model of auditing and settlement under the U.S. and British systems of allocating litigation costs between a plaintiff and defendant and compare the level of equilibrium auditing and audit pricing across the two regimes. If the unit cost of auditing is sufficiently high, then the system in the U.K. induces more auditing than does the U.S. system. Second, for some parameters, the system in the U.K. achieves this result while inducing lower audit prices.

Suggested Citation

  • Reed Smith & Donald Tidrick, 1998. "The Effect of Alternative Judicial Systems and Settlement on Auditing," Review of Accounting Studies, Springer, vol. 2(4), pages 353-381, December.
    • Handle: RePEc:spr:reaccs:v:2:y:1998:i:4:d:10.1023_a:1018688203809
    DOI: 10.1023/A:1018688203809
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