Do Auditors Change their Behavior after Litigation? - Evidence from Audit Fee and Audit Quality -

Abstract

This study examines whether auditors change their behavior in terms of audit quality and audit fees after litigation. The findings in this paper are summarized as follows. First, auditors increase audit efforts to improve audit quality after litigation against them, as suggested by Lennox and Li(2014). Second, auditors charge higher audit fees for both continuing and new clients after litigation against them. These results support the hypothesis that auditors adjust audit pricing mechanism to reflect increased audit efforts and/or expected legal liability. In addition, this paper investigates how litigation against auditors affects the way investors evaluate audit quality in the capital market. It is found that earnings response coefficients decrease with auditors exposure to litigation. In particular, the decreases in earnings response coefficients are more pronounced for firms with higher agency costs, supporting the role of auditors in reducing agency costs.