scholarly journals Auditors’ Liability to Lenders and Auditor Conservatism

2020 ◽  
Vol 66 (8) ◽  
pp. 3788-3798
Author(s):  
Pei-Cheng Liao ◽  
Suresh Radhakrishnan
Keyword(s):  
Spillover Effect ◽  
Legal Liability ◽  
Expected Payoff ◽  
Audit Failure ◽  
Good State ◽  
Auditor Conservatism

We examine the near-privity rule that increases the auditor’s legal liability exposure by considering a debtholder who can sue the auditor and recover damages when there is an audit failure. We show that the increase in the auditor’s legal liability induces the auditor to choose more informative and more conservative efforts. Although the increased informative effort has a favorable spillover effect that increases the equityholder’s expected payoff, the increased conservative effort induces a bias—that is, decreases the likelihood of reporting a true good state as good—and thus induces an adverse spillover effect that decreases the equityholder’s expected payoff. As such, when the conservative effort bias is small, the favorable spillover effect dominates the adverse spillover effect, and the equityholder prefers the near-privity regime. This paper was accepted by Suraj Srinivasan, accounting.

The Effects of Decision-Aid Use and Reliability on Jurors' Evaluations of Auditor Liability

2002 ◽  
Vol 77 (1) ◽  
pp. 185-202 ◽  
Author(s):  
D. Jordan Lowe ◽  
Philip M. J. Reckers ◽  
Stacey M. Whitecotton
Keyword(s):  
Decision Aid ◽  
High Reliability ◽  
Decision Aids ◽  
Legal Liability ◽  
Auditor Liability ◽  
Audit Failure

This study provides evidence on how auditors' use of decision aids affects jurors' evaluation of auditor legal liability, based on an experiment in which actual jurors responded to a hypothetical audit lawsuit. The results suggest that decision aids can have positive, negative, or neutral effects on auditors' legal liability, depending on how auditors use the decision aid and the reliability of the decision aid. For high-reliability aids, jurors attributed more responsibility for an audit failure to the auditor when the auditor overrode the recommendation of a decision aid than when the auditor did not use the decision aid. However, jurors attributed lower responsibility to an auditor who relied on the recommendation of a highly reliable decision aid, even though the aid turned out to be incorrect. In contrast to the high-reliability conditions, auditors' use of the decision aid had virtually no impact on jurors' liability judgments when the reliability of the decision aid was low.

The Effects of Audit Quality and Consequence Severity on Juror Evaluations of Auditor Responsibility for Plaintiff Losses

2000 ◽  
Vol 75 (3) ◽  
pp. 327-341 ◽  
Author(s):  
Kathryn Kadous
Keyword(s):  
Audit Quality ◽  
Legal Liability ◽  
Standards Of Care ◽  
Negative Consequences ◽  
Audit Failure ◽  
Ex Post

This study investigates whether providing higher quality audits increases auditors' chances of avoiding legal liability. Negligence rules hold auditors responsible for plaintiff losses only when the quality of the audit provided fails to meet standards of care. The results of my experiment suggest that the ex post observed consequences of audit failure can affect the standards of care to which jurors hold auditors. Specifically, participants serving in the role of jurors assessed higher standards of care for auditors when the consequences of audit failure were more severe. Furthermore, when the consequences of audit failure were more severe, participants' evaluations of the auditor did not depend on the quality of the audit provided—auditors who provided higher quality audits were evaluated just as negatively as those who provided lower quality audits. In contrast, when audit failure led to only moderately negative consequences, auditors who provided higher quality audits received more favorable evaluations. These results suggest that providing higher quality audits will not necessarily protect auditors from legal liability when the consequences of audit failure are severe.

Auditor Liability and Client Acceptance Decisions

2010 ◽  
Vol 85 (1) ◽  
pp. 261-285 ◽  
Author(s):  
Volker Laux ◽  
D. Paul Newman
Keyword(s):  
Rejection Rate ◽  
Legal Liability ◽  
Legal Regime ◽  
Accounting Profession ◽  
Auditor Liability ◽  
Client Engagement ◽  
Audit Failure ◽  
Audit Firms ◽  
Client Acceptance ◽  
The Relationship

ABSTRACT: The accounting profession has raised concerns that excessive liability exposure renders audit firms unwilling to provide audit services to risky clients, limiting the prospective clients' ability to raise external capital. We address this concern in a model in which the auditor evaluates the riskiness of the client before accepting the client engagement. We consider a setting in which a shift to stricter legal liability regimes not only increases the expected damage payments from the auditor to investors in case of audit failure, but also increases litigation frictions such as attorneys' fees. The main finding is that the relationship between the strictness of the legal regime and the probability of client rejection is U-shaped. Our model suggests that in environments with moderate legal liability regimes, the client rejection rate is lower than in environments with relatively strong or relatively weak legal regimes.

Basel III: In quest for criteria and scenarios of the banking regulation reform advancement

2016 ◽  
pp. 77-93 ◽  
Author(s):  
E. Dzhagityan
Keyword(s):  
Financial Regulation ◽  
Cost Optimization ◽  
Spillover Effect ◽  
Regulatory Reform ◽  
Banking Regulation ◽  
Capital Adequacy ◽  
Basel Iii ◽  
Eurasian Economic Union ◽  
Downward Pressure ◽  
Crisis Recovery

The article looks into the spillover effect of the sweeping overhaul of financial regulation, also known as Basel III, for credit institutions. We found that new standards of capital adequacy will inevitably put downward pressure on ROE that in turn will further diminish post-crisis recovery of the banking industry. Under these circumstances, resilience of systemically important banks could be maintained through cost optimization, repricing, and return to homogeneity of their operating models, while application of macroprudential regulation by embedding it into new regulatory paradigm would minimize the effect of risk multiplication at micro level. Based on the research we develop recommendations for financial regulatory reform in Russia and for shaping integrated banking regulation in the Eurasian Economic Union (EAEU).

CIVIL AND LEGAL LIABILITY OF JUDGES

2017 ◽  
Author(s):  
Yaroslav Skoromnyy ◽  
Keyword(s):  
Human Rights ◽  
Pension System ◽  
Legal Liability ◽  
Judicial System ◽  
Constitutional Court ◽  
Model Code ◽  
European Court ◽  
The Status ◽  
The Law ◽  
The Right

The article presents the conceptual foundations of bringing judges to civil and legal liability. It was found that the civil and legal liability of judges is one of the types of legal liability of judges. It is determined that the legislation of Ukraine provides for a clearly delineated list of the main cases (grounds) for which the state is liable for damages for damage caused to a legal entity and an individual by illegal actions of a judge as a result of the administration of justice. It has been proved that bringing judges to civil and legal liability, in particular on the basis of the right of recourse, provides for the payment of just compensation in accordance with the decision of the European Court of Human Rights. It was established that the bringing of judges to civil and legal liability in Ukraine is regulated by such legislative documents as the Constitution of Ukraine, the Civil Code of Ukraine, the Explanatory Note to the European Charter on the Status of Judges (Model Code), the Law of Ukraine «On the Judicial System and the Status of Judges», the Law of Ukraine «On the procedure for compensation for harm caused to a citizen by illegal actions of bodies carrying out operational-search activities, pre-trial investigation bodies, prosecutors and courts», Decision of the Constitutional Court of Ukraine in the case on the constitutional submission of the Supreme Court of Ukraine regarding the compliance of the Constitution of Ukraine (constitutionality) of certain provisions of Article 2, paragraph two of clause II «Final and transitional provisions» of the Law of Ukraine «On measures to legislatively ensure the reform of the pension system», Article 138 of the Law of Ukraine «On the judicial system and the status of judges» (the case on changes in the conditions for the payment of pensions and monthly living known salaries of judges lagging behind in these), the Law of Ukraine «On the implementation of decisions and the application of the practice of the European Court of Human Rights».

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