Auditor Litigation, Audit Office Pricing, and Client Acceptance

• In Event: Litigation Risk

Abstract

This study examines how lawsuits against auditors affect the audit pricing and client acceptance strategies of the audit offices responsible for the failed audit. We find that audit offices increase their audit fees following the filing of the lawsuit. Further, there is evidence of a contagious effect, as litigation offices increase their fees for both the litigation clients and other clients in the same office as the litigation clients. We also find that litigation offices are less likely to have new engagements following the start of litigation and that their new clients are less likely to be from high litigation-risk industries than their existing clients. Our results suggest that litigation has a significant impact not only for auditors but also for the litigation clients and their office peers.

Authors

• Chan Li, University of Pittsburgh

• Yangyang Fan, University of Pittsburgh

• Nandu Nagragian, The University of Texas at Arlington

• Jared Smith, University of Pittsburgh