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    The Influence of Auditor State-Level Legal Liability on...
    research summary posted September 10, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk 
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    Title:
    The Influence of Auditor State-Level Legal Liability on Conservative Financial Reporting in the Property-Casualty Insurance Industry
    Practical Implications:

    The main implication for practicing auditors is that state-level legal liability is affecting auditor behavior and possibly audit quality. For audit firms with a national or regional presence, this may mean an increased emphasis on standardization is necessary to ensure that the quality of audits vary by state.

    Citation:

    Gaver, J.J., J.S. Paterson and C.J. Pacini. 2012. The Influence of Auditor State-Level Legal Liability on Conservative Financial Reporting in the Property-Casualty Insurance Industry. Auditing: A Journal of Practice and Theory. (31) 3:95–124.

    Keywords:
    auditor liability, accounting discretion, insurance industry, reserve management, conservatism
    Purpose of the Study:

    This study examines the issue state-level legal liability and its effect on auditors. Specifically, this paper looks at whether increased state-level liability for ordinary negligence leads auditors to push for a greater degree of conservatism.

    Design/Method/ Approach:

    The authors use 3,107 loss reserve observations spanning the years from 1993 to 2004. The sample is restricted to private insurers that operate under single state control. The authors use these observations to determine whether or not the imposition of greater legal liability on auditors leads to increased conservatism.

    Findings:

    Extant accounting literature demonstrates that litigation risk affects both auditor behavior and audit quality. However, that literature focuses exclusively on the impact of federal-level statutory law. This paper provides evidence that state-level liability standards also affect auditor behavior.

    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Litigation Risk