Litigation Risk Factors As Identified By Malpractice Insurance Carriers

Abstract

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.

Audit Firm Attributes and Auditor Litigation Risk

“…There are only a few studies that we are aware of using professional liability insurance information to proxy for auditors' litigation risk. Linville and Thornton () use insurance application forms of eight insurance companies for investigating the determinants of litigation risk of non‐Big 5 audit firms. The authors report that insurance companies require audit firms to provide a list of services provided, employee status, gross auditor revenues, the status of continuing professional education, the system used to monitor conflicts of interests, peer reviews conducted, and engagement letter policies.…”

Determinants Of Enforcement Action By The Financial Supervisory Service Of Korea From The Perspective Of Audit Firms

“…For example, Schultz and Gustavson (1978) argued that the likelihood of audit failure as perceived by actuaries increases as the size of audit firms and number of clients increase. Linville and Thornton (2001) investigated risk factors considered by insurance firms, reporting that in evaluating risk factors of audit firms, insurance firms consider several characteristics of audit firms, including gross revenue, the diversity of services in proportion to total revenue, the opportunity for ongoing professional education, and the peer review policy. In this study, we use two proxies for ex-post audit failure: sanctioning of an audit firm by Most studies include analysis of the causes of enforcement action and suggest solutions from the perspective of audit clients.…”

A Multidisciplinary Approach To Risk Management For Accounting Firms

“…A firm will spend more on self-protection if the marginal benefits of self-protection exceed its marginal cost. Benefits of self-protection include a lower likelihood of losses, an increase in quality reputation, and a lower cost of market insurance and self-insurance (Linville and Thornton 2000). Costs of self-protection include expenditures on personnel, technology, organization structure, and job design.…”

“…In instances of litigation loss, firms' partners bear the risk of losing not only firm's assets, but also the risk of losing their personal assets. A professional corporation (PC) form of business organization can provide limited protection for partners' personal assets in such instances (Linville and Thornton 2000). Organization structure has also been identified in organization theory literature as a variable that impacts the effectiveness of the organization (Robbins 1990).…”

“…It is assumed that firms have a preference for a state of no loss 4. In a study that involves eight of the major carriers of malpractice insurance for CPA firms,Linville and Thornton (2000) found that these insurance carriers offer significant reduction in premiums to firms that educate partners and staff about potential litigation pitfalls.…”