Managerial legal liability and Big 4 auditor choice

Hsin-Yi Chi and Tzu-Ching Weng

Journal of Business Research, 2014, vol. 67, issue 9, 1857-1869

Abstract: This study investigates the effect of directors' and officers' (hereafter D&O) liability insurance coverage on auditor choice. Based on a sample of 671 Taiwanese listed firms with D&O legal liability insurance data, our evidence shows that companies with excess D&O liability insurance coverage are less likely to appoint Big 4 auditors. Furthermore, we find that Big 4 auditors are more likely to issue unclean opinions and to constrain the abnormal accruals and ‘beating or meeting’ earnings benchmarks for their clients with excess D&O liability insurance coverage. The findings document that a higher level of D&O liability insurance coverage increases Big 4 auditors' concerns about the credibility of financial statements. Given this, Big 4 auditors have incentive to require more conservative accounting choices for these clients in order to minimize possible litigation risk and reputation damage.

Keywords: Managerial legal liability; Big 4 auditors; Going concern; Earnings management (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:67:y:2014:i:9:p:1857-1869

DOI: 10.1016/j.jbusres.2013.12.003

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