Earnings string breaks, accounting litigation risk and audit fees
ISSN: 0268-6902
Article publication date: 10 August 2023
Issue publication date: 9 November 2023
Abstract
Purpose
This study aims to investigate whether accounting-related litigation is associated with a break in the client’s earnings string and the auditor’s response to a break in the earnings string.
Design/methodology/approach
The authors use regression models on a sample of publicly-traded USA companies with earnings strings.
Findings
The authors find that clients’ earnings string breaks are associated with increased accounting litigation risk and audit fees. The results are more prevalent for larger breaks.
Research limitations/implications
The findings suggest auditors anticipate string breaks by clients which implies that audit fee research should consider earnings string characteristics in the fee models.
Practical implications
The auditor’s access to private information allows them to anticipate string breaks and potential increase in litigation risk.
Originality/value
An earnings string break represents a convergence of concerns highly relevant to the auditor: more users relying on the financial statements with greater expectations, increased likelihood of losses to those users, an environment where the likelihood of misstatement may increase, and explicitly stated professional responsibilities in response to the latter. Despite that, and a rich earnings string literature, prior studies have not directly examined auditors’ response to a client’s string break.
Keywords
Acknowledgements
The authors would like to thank Jayanthi Krishnan, Linda Myers, Bharat Sarath, and Jie Zhou for their helpful comments, as well as participants at the American Accounting Association 2017 Auditing Midyear Meeting, the American Accounting Association 2017 Annual Meeting and the University of South Florida research workshop.
Citation
Robinson, D., Smith, T., Whitworth, J.D. and Zhang, Y. (2023), "Earnings string breaks, accounting litigation risk and audit fees", Managerial Auditing Journal, Vol. 38 No. 7, pp. 1024-1052. https://doi.org/10.1108/MAJ-03-2022-3472
Publisher
:Emerald Publishing Limited
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