We examine the application forms of the major insurance companies to identify risk factors associated with non-Big 5 CPA firm litigation. We find considerable agreement among insurers as to the client-specific and firm-specific information they request. Moreover, the information requested by insurers confirms several client-specific risk factors found significant in prior research, and introduces several firm-specific risk factors that should be examined in the future.

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 is an empirical examination of the use of malpractice insurance by independent auditors. Higher insurance premiums are found in states that utilize the foreseeable third-party standard. Auditors who perceive higher litigation risk are found to be willing to bear higher insurance premiums and to opt for higher coverage. Overall, the results suggest that state tort provisions influence litigation risk and malpractice insurance is used to mitigate this risk.¹</span></span></span></p>

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