Disclosure of Internal Control Weaknesses and Auditors' Litigation Risk
Journal
Auditing: A Journal of Practice & Theory
Journal Volume
43
Journal Issue
1
Start Page
51
End Page
71
ISSN
0278-0380
1558-7991
Date Issued
2023-12-29
Author(s)
Kevin C. W. Chen
Abstract
We investigate whether the concern of shareholder litigation motivates auditors to disclose internal control weaknesses. We document that issuing adverse internal control opinions reduces the likelihood of auditors being named with their clients as defendants in shareholder lawsuits. This finding suggests that auditors can reduce their legal liability arising from failed financial statement audits by increasing the quality of internal control audits. Consistent with this expectation, we find that auditors are more likely to issue such opinions in a timely manner for clients with higher ex ante litigation risk. Overall, our evidence suggests that the threat of litigation provides an incentive rather than a disincentive for auditors to issue adverse internal control opinions for clients with higher litigation risk.
Subjects
auditor litigation
internal control weaknesses
litigation risk
SDGs
Publisher
American Accounting Association
Type
journal article