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Litigation Risk, Audit Quality, and Audit Fees: Evidence from Initial Public Offerings

The Accounting review, 2008-09, Vol.83 (5), p.1315-1345 [Peer Reviewed Journal]

Copyright 2008 American Accounting Association ;Copyright American Accounting Association Sep 2008 ;ISSN: 0001-4826 ;EISSN: 1558-7967 ;DOI: 10.2308/accr.2008.83.5.1315 ;CODEN: ACRVAS

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Title:
Litigation Risk, Audit Quality, and Audit Fees: Evidence from Initial Public Offerings
Author: Venkataraman, Ramgopal ; Weber, Joseph P. ; Willenborg, Michael
Subjects: Accounting research ; Auditing ; Auditors ; Audits ; Business accounting ; Business audits ; Business structures ; Corporate finance ; Creative accounting ; Fees ; Financial accounting ; Financial audits ; Financial statements ; Initial public offering ; Initial public offerings ; Litigation ; Management audits ; Professional fees ; Risk exposure ; Start up firms ; Stock prices ; Studies
Is Part Of: The Accounting review, 2008-09, Vol.83 (5), p.1315-1345
Description: We use the IPO setting to examine the relation between auditor exposure to legal liability and audit quality and audit fees. With regard to audit quality, we report robust evidence that pre-IPO audited accruals are negative and less than post-IPO audited accruals. In contrast to extant literature, our findings provide scant support for the inference that auditors acquiesce to opportunistic earnings management by issuers in an attempt to increase the offering price. With regard to audit fees, we find auditors earn higher fees for IPO engagements than post-IPO engagements. While inherent differences in auditor responsibilities between IPO audits and post-IPO audits should lead to higher fees for IPOs, a substantial portion of IPO audit fees (in levels and changes) is associated with our proxy for the auditor's 1933 Act exposure. Overall, our results suggest that both audit quality and audit fees are higher in a higher-litigation regime, consistent with the effects an increase in litigation exposure should have on auditor incentives.
Publisher: Sarasota: American Accounting Association
Language: English
Identifier: ISSN: 0001-4826
EISSN: 1558-7967
DOI: 10.2308/accr.2008.83.5.1315
CODEN: ACRVAS
Source: ProQuest Central

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Litigation Risk, Audit Quality, and Audit Fees: Evidence from Initial Public Offerings

Copyright 2008 American Accounting Association ;Copyright American Accounting Association Sep 2008 ;ISSN: 0001-4826 ;EISSN: 1558-7967 ;DOI: 10.2308/accr.2008.83.5.1315 ;CODEN: ACRVAS

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