Does Litigation Experience Improve Audit Partners' Audit Quality?

Abstract

This study investigates whether an audit partner's litigation experience affects subsequent audit quality. Using a sample of financially distressed public firms in Taiwan from 1999 to 2023 and employing the accuracy of the going-concern opinion (GCO) as a proxy for audit quality, this study documents that defendant audit partners remain more likely to issue GCOs to non-bankrupt firms after being sued, suggesting that GCO Type I errors contaminate subsequent audits. However, this contagion phenomenon will be mitigated after the district courts rule in favor of the defendant audit partners. On the other hand, this paper also finds that audit partners significantly increase the likelihood of issuing GCOs to soon-to-go-bankrupt firms after being sued, indicating that defendant partners improve audit quality and commit fewer GCO Type II errors, especially those partners whose litigated event clients go bankrupt. Overall, litigation experience does not significantly affect audit partners' GCO Type I errors, but it does significantly reduce GCO Type II errors.