Auditor Experience and the Timeliness of Litigation Loss Contingency Disclosures*

Abstract

This paper hypothesizes and finds that firms audited by city‐industry specialists have more timely disclosures of contingent losses from litigation when there is no news coverage relating to the legal case prior to management disclosures. A closer examination reveals that this result is explained by the specialist auditors’ prior experience auditing clients in the same office and industry who are involved with litigation. In our setting, disclosures of litigation‐related contingent losses, we identify two kinds of knowledge generated from experience: industry knowledge and litigation knowledge. Industry knowledge helps auditors detect and correct poor implementation of guidance for litigation loss contingency disclosures. Auditors gain litigation knowledge from auditing clients in a given office and industry with previous involvement as defendants. Thus, the two types of knowledge interact in their effects on reporting outcomes.

Do Individual Risk Attitudes, Experience, and Organizational Culture Influence the Conservatism of Indonesian Auditors?

“…The finding of this study that shows that experience negatively influences auditor conservatism are also consistent with findings of previous studies, particularly those by Pflugrath et al (2007), Asare et al (2009), Chen et al (2018, and Schafer & Schafer (2019). This finding, in reporting.…”

“…The second hypothesis predicts that experience will influence the extent of the conservatism of auditors. This hypothesis draws upon the findings of previous studies such as Pflugrath et al (2007), Asare et al (2009), Chen et al (2018, and Schafer & Schafer (2019) that demonstrate that there are substantial differences in the audit judgements and decisions between more-experienced and lessexperienced auditors. In particular, these studies generally find that less-experienced auditors, due to their limited knowledge and exposure to audit tasks, tend to be more cautious when applying audit procedures prescribed in the auditing standards.…”

“…This study, instead, builds on the notion that auditor conservatism results from individuals' judgements and decisions; hence it can be influenced by personal, professional, and organisational characteristics (Bonner, 2008;Mactavish, McCracken, & Schmidt, 2018). Prior empirical studies have suggested that attitude towards risk, extent of professional experience, and organisational values are among the most important determinants of an individual's decision-making behaviour in various accounting and auditing contexts (Basu, Hwang, & Jan, 2001;Pflugrath, Martinov-Bennie, & Chen, 2007;Law, 2008;Asare, Cianci, & Tsakumis, 2009;Chen, Hou, Richardson, & Ye, 2018;Schafer & Schafer, 2019). The framework developed, and the evidence provided, by prior studies present the basis for using individual risk attitude, experience, and organisational culture in the development of theory and the formulation of hypotheses in the present study.…”

Repetitive Disclosures in the MD&A

“…However, for 103 firms with publicly announced hazardous waste lawsuits, Little, Muoghalu, and Robinson (1995) find no systematic relation between market reactions and contingency-note disclosures. In a recent study, Chen et al (2014) find that prior litigation-loss contingency disclosures mitigate the market reaction to material loss announcements. Thus, the evidence from extant research is mixed and inconclusive.…”

How have US banks adopted the Financial Accounting Standards Board's Level 3 fair value disclosure rules?

“…Chen et al . () document noncompliance with disclosure requirements relating to litigation losses mandated under ASC Topic 450, but when the firms are audited by an industry specialist, the authors find that compliance with GAAP rules increases.…”