Litigation risk, financial reporting and auditing: A survey of the literature

Ahsan Habib*, Haiyan Jiang, Md Borhan Uddin Bhuiyan, Ainul Islam

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)

Abstract

This paper surveys the literature on the determinants and consequences of securities class action lawsuits against firms and auditors from a financial reporting quality perspective. The survey is motivated by the important role that law plays in protecting stakeholders' interests against managerial misdeed. Litigation is, thus, an important topic and numerous studies investigate the determinants and consequences of firm and auditor lawsuits. The underlying premise of these studies is built on the notion that large financial and reputational penalties associated with successful securities class actions can discipline management and deter them from future wrongdoing. The survey documents that poor quality financial reporting as evidenced in earnings restatements has been the primary antecedent for class action lawsuits against the firm and auditors. Lawsuits against auditors affect audit fees, audit planning decisions and client portfolio adjustment decisions. Although significant progress has been made in terms of further understanding the causes and consequences of litigation against auditors, major challenges remain in the area of proper measurement of litigation risk.

Original languageEnglish
Pages (from-to)145-163
Number of pages19
JournalResearch in Accounting Regulation
Volume26
Issue number2
DOIs
Publication statusPublished - 1 Jan 2014
Externally publishedYes

Keywords

  • Accounting restatements
  • Auditor litigation
  • Management earnings disclosures
  • Securities class action lawsuits

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