Do auditors price litigious tone?

We investigate whether audit fees are shaped by litigious tone. Using a sample of listed firms in the US, we find litigious tone in 10‐K reports is associated with higher audit fees. This finding remains robust when we account for sample selection bias, firm‐level unobserved heterogeneity effects, e...

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Bibliographic Details
Published inAccounting and finance (Parkville) Vol. 62; no. S1; pp. 1715 - 1760
Main Authors Malik, Muhammad Farhan, Shan, Yuan George, Tong, Jamie Yixing
Format Journal Article
LanguageEnglish
Published Clayton Blackwell Publishing Ltd 01.04.2022
Subjects
Audit fees
Auditors
Litigation
Litigious tone
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Summary:We investigate whether audit fees are shaped by litigious tone. Using a sample of listed firms in the US, we find litigious tone in 10‐K reports is associated with higher audit fees. This finding remains robust when we account for sample selection bias, firm‐level unobserved heterogeneity effects, endogeneity concerns, or when subsections in 10‐K reports are analysed. In addition, we document the relationship is of a lower magnitude among high‐risk client firms, suggesting that auditors are already cautious when auditing high‐risk clients. This suggests that auditors rely less on litigious tone in determining audit fees when faced with high‐risk clients.
Bibliography:We thank Gary Monroe and David Lont (editors) and the anonymous reviewers for their helpful comments that significantly improved the paper. We thank the attendees at the 2020 Virtual AFAANZ Conference, and the seminar participants at the University of Western Australia for helpful comments and suggestions. We gratefully acknowledge Philip Brown for his invaluable comments on the earlier version of this paper. We would like to thank the Government of the Commonwealth of Australia and the University of Western Australia for research funding to support this project.
ISSN:0810-5391
1467-629X
DOI:10.1111/acfi.12837