The Effects of the Extant Clauses Limiting Auditor Liability on Audit Fees and Overall Reporting Quality. Issue 2 (30th April 2019)

• Record Type: Journal Article
• Authors: Louis, Henock; Pearson, Thomas C.; Robinson, Dahlia M.; Robinson, Michael N.; Sun, Amy X.
• Is Part Of: Journal of empirical legal studies. Volume 16:Issue 2(2019)
• Page Start: 381
• Page End: 410
• Publication Date: 2019-04-30
• Subjects: Law -- Periodicals; Law -- Research -- Periodicals; 340
• DOI: 10.1111/jels.12218
• Languages: English
• ISSNs: 1740-1453

Abstract

Abstract : Regulators and shareholders generally oppose any restriction on clients' rights to sue their auditors, believing that such restrictions would impair reporting quality. However, the evidence suggests that the opposition to limitation of liability agreements (LLAs) between clients and auditors is likely unwarranted. Specifically, the evidence indicates that LLAs are beneficial to clients by lowering their audit fees. More importantly, we find no evidence that they impair financial reporting quality in general. Hence, the extant contracts limiting clients' rights to sue their auditors appear to benefit auditors and their clients without any apparent detriment to the quality of financial reporting.