The Effect of Litigation on Independent Auditor Selection

Mary F. Allen, Mark Linville and David M. Stott
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Mary F. Allen: Boise State University
Mark Linville: Kansas State University
David M. Stott: Bowling Green State University

American Journal of Business, 2005, vol. 20, issue 1, pages 37-45

Abstract: We examine the role of past litigation in the selection of independent auditors. Using a sample of persons typically involved in auditor selection, we find that any litigation announcement alleging audit improprieties greatly reduces the auditorÕs likelihood of hire regardless of the type of legal action announced or the degree of direct involvement by the auditor. Based on these findings, litigation imposes an indirect (and potentially substantial) cost by impeding the CPAÕs ability to attract new clients.

Keywords: Accounting; independent auditors; litigation; CPSA's (search for similar items in EconPapers)
JEL-codes: R00 Z0 (search for similar items in EconPapers)

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