An Empirical Research on the Effect of Changes in Audit Liability on Large Audit Firm Client Selection
Date Issued
2008
Date
2008
Author(s)
Lai, Shin-Tsang
Abstract
In recent years, corporate fraud incurred in succession leads to the public emphasizing the duty of CPA, and leads to the regulations on auditor’s responsibility getting servere. Moreover, because the Securities and Futures Investors Protection Center, who brings lawsuits and asks arbitration in behalf of investors, was established in 2003, the litigation risk faced by auditors is steadily on the increase. In order to survive on the growing legal liabilities, big CPA firms start emphasizing client selection, and set up client acceptance reviewing group taking charge of risk management, assessments of independence and management integrity. o verify the growing audit liability will lead to large audit firms increasing client selection standards, this study divides recent years into 3 periods by the extent of audit liability exposure: Pre-Enron period (1999~2001), Post-Enron period (2002~2003), and Post- Procomp period (2004~2006). Regarding to the measurement of client selection standard, this study focuses on client’s financial risk and refers to the clients classification mothod used by Choi et al. (2004) partitioning listing companys into four categories: continuing big 4 clients, new big 4 clients, departing big 4 clients, and continuing non-big 4 clients.his study uses two-sample t test and wilcoxon signed rank sum test and refers to linear multi-regression model used by choi et al. (2004) to examine the difference between different periods and different kinds of clients. This study also refers to logistics regression model used by Jones and Raghunandan (1998) to test the impact on large audit firm client selection. Beside, this study utilizes probability test to examine the changes in the propotion of high risk clients accepted by large audit firms.he empirical analysis results suggest that large audit firms incline not to supply audit service to the public companies which are perceived as high risk, when there is higher concern over legal liability. If client’s financial condition is turning into worse the large audit firms won’t continuously retain that client. This study also provides evidence that because of increasing litigation costs in recent years large audit firms raise its client selection standard in clients’ financial condition.
Subjects
Audit liability
Client selection
Audit firm
Litigation risk
Audit decision
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