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Accounting Review


auditor liability; client acceptance decisions; client risk.


  1. Volker Laux
  2. D. Paul Newman




    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.


    Vol 85, Nomor 01, Tahun 2010


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