Litigation Risk and Abnormal Accruals

• DOI: 10.2308/ajpt-50003
• Publication Date: 2011-05-26T13:29:22Z
• Authors: Jeff P. Boone; Inder K. Khurana; K. K. Raman
• Keywords: Litigation risk analysis; Endogeneity; Earnings Management; Inherent risk (accounting)

SUMMARY In this paper, we examine the relation between auditor litigation risk and abnormal accruals over 1989–2007 time period. We address potential endogeneity in prior studies by jointly modeling a simultaneous equation system. Our findings suggest that client-specific affects incentives to acquiesce client demands for earnings management, i.e., higher of litigation, greater auditor's restraining influence on reported client. also find evidence increase likelihood litigation. document 1995 Public Securities Litigation Reform Act (PSLRA) lowered reform remains topic ongoing interest. contribute better understanding effects (and related changes legal exposure) management.