We examine the role of past litigation in the selection of independent auditors. Using a sample of persons typically involved in auditor selection, we find that any litigation announcement alleging audit improprieties greatly reduces the auditor's likelihood of hire regardless of the type of legal action announced or the degree of direct involvement by the auditor. Based on these findings, litigation imposes an indirect (and potentially substantial) cost by impeding the CPA's ability to attract new clients.We manipulate a public signal of audit litigation... to determine if and how this information affects a...decision to hire the auditor.
<p class="MsoNormal" style="text-align: justify; margin: 0in 37.8pt 0pt 0.5in;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Batang;">This study employs pro-forma company footnote disclosures to assess the value-relevance of employee stock option compensation expense using the fair value method as stipulated by Statement of Financial Accounting Standard No. 123.<span style="mso-spacerun: yes;"> </span>The study is motivated by the controversy surrounding the issue of accounting for employee stock options and the countervailing effects of issuing stock options on firm value.<span style="mso-spacerun: yes;"> </span>Although accounting regulators and the business community agree that employee stock options have value and therefore, are a form of compensation, critics of the FASB’s proposed fair value method of accounting for employee stock options argue that measuring the compensation expense using contemporary models will result in unreliable and meaningless measures.<span style="mso-spacerun: yes;"> </span>Moreover, the expected future benefits from granting stock options suggest that this form of employee compensation is not a typical expense.<span style="mso-spacerun: yes;"> </span>We find a significant association between the disclosed compensation expense using the fair value method and firm value that is in the opposite direction from other income statement expenses.<span style="mso-spacerun: yes;"> </span>This result implies that the disclosed employee stock option expense is a value-relevant measure and the incentives derived from employee stock option plans provide value-increasing benefits to the firm.<span style="mso-spacerun: yes;"> </span>In addition, we find the positive association between the employee stock option expense and firm value is greater for firms with more growth opportunities.</span></span></span></p>
New regulation by the Public Company Accounting Oversight Board (PCOAB) and the International Auditing & Assurance Standards Board (IAASB) regarding changes to the way audit opinions are signed has resulted in very different outcomes. The PCAOB requires audit firms to report the audit partner's name on Form AP, which is available on the PCAOB website. The IAASB, on the other hand, requires mandatory disclosure of the audit partner on the audit opinion. Opponents argued that requiring partner signature would increase liability. Based on a scenario depicting fraudulent activity, assessed jury negligence is higher when the partner signs their name to the audit opinion than when they sign their firm's name when measuring both partner and firm negligence. Firm size was assessed but found to be insignificant. Finally, we examined the effect of psychological contract violation theory in relation to the audit opinion signature method, with results suggesting the relationship between signature method and perceived auditor negligence is mediated by trust.
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