Pending Litigation and the Audit Report Lag: Evidence from China

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Abstract

Audit clients may be defendants in lawsuits that are unresolved at year-end (pending litigation). Clients with pending litigation may be more time-consuming to audit as a result of the complexity and subjectivity of estimated related to the outcome of pending litigation, which is a type of contingent liability. Among Chinese listed companies, we find that 7.4% face pending litigation at year-end and that these companies take longer to audit (i.e., have longer audit report lags). These results are strongest among companies not governmentally-controlled, and for those based in regions of China with more developed legal systems.

Authors

• Liu Hui, xi'an jiaotong university

• Charles P Cullinan, Bryant University

• Junrui Zhang, Xi'an Jiaotong University