The Effect of Alternative Judicial Systems and Settlement on Auditing

Reed Smith () and Donald Tidrick
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Reed Smith: University of Oregon
Donald Tidrick: University of Oregon

Review of Accounting Studies, 1998, vol. 2, issue 4, No 3, 353-381

Abstract: Abstract The accounting profession claims that the substantial litigation costs incurred to defend against negligence claims are used by plaintiffs to coerce settlement. We examine a model of auditing and settlement under the U.S. and British systems of allocating litigation costs between a plaintiff and defendant and compare the level of equilibrium auditing and audit pricing across the two regimes. If the unit cost of auditing is sufficiently high, then the system in the U.K. induces more auditing than does the U.S. system. Second, for some parameters, the system in the U.K. achieves this result while inducing lower audit prices.

Keywords: Public Finance; Unit Cost; Judicial System; Accounting Profession; Litigation Cost (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1023/A:1018688203809

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