Financial reporting quality and audit firms’ past experiences of litigation

This study investigates whether financial reporting quality is affected by an audit firm’s experience of litigation in the recent past. I find that the likelihood of an accounting misstatement and the magnitudes of misstatements are significantly lower for non-Big 4 auditors who recently suffered high litigation compared with non-Big 4 auditors who did not. In addition, I find an improvement in financial reporting quality subsequent to Big 4 auditors’ recent litigation experiences when the analysis is conducted at the audit office level. These results are consistent with my prediction that litigation has a disciplinary effect on auditors and leads to higher financial reporting quality.DOCTOR OF PHILOSOPHY (NBS