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

Author

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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.

Suggested Citation

  • Ralf Ewert & Eberhard Feess & Martin Nell, 2000. "Auditor liability rules under imperfect information and costly litigation: the welfare-increasing effect of liability insurance," European Accounting Review, Taylor & Francis Journals, vol. 9(3), pages 371-385.
  • Handle: RePEc:taf:euract:v:9:y:2000:i:3:p:371-385
    DOI: 10.1080/09638180020017122
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    References listed on IDEAS

    as
    1. 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 181-181, March.
    2. repec:bla:joares:v:28:y:1990:i:1:p:77-120 is not listed on IDEAS
    3. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 1-26.
    4. Dye, Ronald A., 1995. "Incorporation and the audit market," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 75-114, February.
    5. repec:bla:joares:v:32:y:1994:i::p:39-59 is not listed on IDEAS
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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.
    2. Ho, Shirley J. & Mallick, Sushanta K., 2015. "A Copayment Auditing Scheme for Financial Misreporting," The International Journal of Accounting, Elsevier, vol. 50(1), pages 53-74.

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