Legal Disputes Against Independent Auditors: Insights from Prominent Attorneys

• In Event: Audit partners, Legal Disputes & Auditor-Client Relationships

Abstract

In the early 1990’s, thought leaders within the accounting profession called for empirical research examining factors related to the causes, outcomes, and effects of legal claims against auditors. Accounting researchers vigorously responded to this call with archival research focusing on providing important insights about the factors associated with the likelihood of trials and experimental research focusing on factors affecting expected outcomes of trials, though the majority of cases settle and never reach trial. Notably, the experimental research relies on an untested assumption that settlement negotiations are largely driven by the likely outcomes of trials. We suspect that the lack of research examining this assumption and, more generally, research examining the resolution of disputes against auditors outside of trials, is due, in part, to an incomplete understanding of the resolution process. The extant accounting research literature is rich, but lacks insights on important questions such as how the cases that go to trial differ from those that settle, what role adequate insurance coverage plays in decision to sue auditors, and others. We confirm our current understanding and provide new insights about these important questions by interviewing 21 prominent attorneys with an average of 25 years of experience representing either plaintiffs and/or defendants in legal disputes against auditors. Among the key new insights our study provides are the following: (1) juror judgment research is highly relevant despite few cases going to trial; (2) insurance companies play a significant role in auditor dispute resolution; (3) Big 4 firms view legal disputes as normal and attorneys perceive them as being less influenced by reputation concerns than the general public believes; (4) a significant proportion of all claims against auditors settle without being filed with the courts; and (5) arbitration and mediation play significant roles in resolution of legal disputes.

Authors

• Eldar Maksymov, Arizona State University

• Jeffrey Scott Pickerd, University of Massachusetts-Amherst

• D. Jordan Lowe, Arizona State University - Tempe

• Mark Peecher, University of Illinois-Urbana-Champaign

• Andrew Buthod Reffett, Miami University