Page 208 - 36-1

Does Litigation Experience Improve Audit Partners’ Audit Quality?

5. Contributions

This study complements several contributions to the auditing literature. First, the
study responds to the calls of Anantharaman, Pittman, and Wans (2016) and Chy, Franco,

and Su (2021) to examine the relationship between legal environments and auditors’
behavior. Second, avoiding litigation is an important incentive for auditors to maintain
audit quality (Khurana and Raman, 2004). However, empirical evidence on whether
litigation positively influences negligent auditors’ behaviors is limited. This study

supplements litigation-avoidance theory by providing evidence that defendant partners
subsequently improve audit quality following litigation. Third, because audit firms in
the United States are liable for audit negligence, the existing audit litigation literature
primarily documents evidence at the audit firm or office level (Lennox and Li, 2014;

Schmidt, 2009). In contrast, signing audit partners in Taiwan assume legal liability. This
study extends the literature by providing evidence of audit litigation at the partner level.
Fourth, Anantharaman et al. (2016) show that litigation risk increases the likelihood of
auditors issuing GCOs to financially distressed clients. However, they do not determine

whether auditors respond to litigation risk by improving audit quality or by increasing
conservatism. This study uses GCO Type I and II errors to distinguish between the learning
hypothesis and the conservative hypothesis, and obtains results that do not support the
conservative hypothesis. Fifth, concerning the consequences of audit failures at the partner

level, prior studies have focused on audit failure events, such as financial restatements (Li
et al., 2017), GCO errors (Knechel et al., 2015), and regulatory sanctions (Chang et al.,
2016; Hung and Yen, 2011). This study extends the audit failure consequence literature by
using audit litigation as a proxy for audit failure events. Finally, audit work is performed

by individual auditors, and prior studies (e.g., DeFond and Francis, 2005; DeFond and
Zhang, 2014; Francis, 2011) have emphasized the importance of providing evidence at the
partner level. By offering evidence of the effects of partners’ litigation experiences, this
study responds to their call.

Future researchers may overcome the data limitations of this study by incorporating
lawsuits initiated by investors or firms, thereby allowing for comparisons of whether
the degree of public interest damage differentially affects auditors’ behavior following
lawsuits. Moreover, the aim of both judicial litigation and administrative oversight

200