The Effects on financial statements of the litigation cost rule in a civil action for negligence against the auditor

Paul Barnes

Research output: Contribution to journalArticle

Abstract

The litigation cost rule relates to which of the two parties in a civil lawsuit has to pay the legal costs. In those countries where the American system applies, each has to pay their own legal costs. In most other countries, the British system applies and the loser pays all the legal costs. By means of a single person decision-theoretic model, I examine the effects of this on auditing and financial statements under certainty and uncertainty conditions. Generally, the American system has the effect of restraining shareholders from suing unless they are able to cover their legal costs, thereby providing scope for under- or over-statements, depending on management’s wishes. This scope is denied under the British system and, as a result, audited financial statements will not be similarly biased.
Original languageEnglish
Pages (from-to)170-182
Number of pages13
JournalJournal of Contemporary Accounting and Economics
Volume9
Issue number2
DOIs
Publication statusPublished - 2013

Keywords

  • Auditor
  • Opportunistic earnings management
  • Litigation cost
  • Negligence
  • Fraud

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