Auditor Litigation, Audit Office Pricing and Client Acceptance

This study examines how lawsuits against auditors affect the audit pricing and client acceptance strategies of both the audit offices responsible for the failed audit and other audit offices of the same audit firm. We find that non-litigation offices of litigation audit firms decrease their fees following the filing of a lawsuit. However, audit offices involved in litigation increase their audit fees following the filing of the lawsuit. Further analyses indicate that the increase in audit fees charged by litigation offices is driven by clients’ high switching cost, and low bargaining power. We also find that both litigation and non-litigation offices of audit firms involved in litigation are less likely to have new engagements following the start of the litigation and that the new clients are likely to be smaller, have higher abnormal accruals, and have had recent restatements compared to their existing clients. However, compared to new engagements before litigation, new engagements of litigation offices after litigation are likely to be larger, have lower leverage, and are less likely to receive a going concern opinion. Our results suggest that litigation has a significant impact not only for auditors involved in litigation, but also for non-litigation clients of the litigation office and litigation firm. Auditor Litigation, Audit Office Pricing and Client Acceptance