The effect of firm-specific litigation risk on independent director conservatism

Liu, Guoping; Sun, Jerry

doi:10.1108/mf-08-2020-0442

Cited by 5 publications

(7 citation statements)

References 49 publications

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“…We add a control variable for auditor change ( AuditorCHG it ) because research has noted that firms having changed auditors appear more likely to have internal control difficulties (Ashbaugh et al , 2007). A categorical variable for having received a going-concern opinion ( GC it ) is also added, because it signifies an increased likelihood of litigation (DeFond and Jiambalvo, 1994; Liu and Sun, 2022). Companies with a “Big 4” auditor have been found to be less likely to report internal control problems (Ge and McVay, 2005), and troubled client firms are less likely to be able to afford the larger audit firms (Zhang et al , 2007); firms that restructure often exhibit generalized instability and disarray (Doyle et al , 2007b).…”

Section: Methods and Datamentioning

confidence: 99%

“…Prior studies have provided evidence regarding how board independence and board diligence lead to sound corporate governance (Goh, 2009;Lin and Hwang, 2010). Abbott et al (2004) indicate that the independence and meeting frequency (a proxy for diligence) of the audit committee directors can effectively reduce the occurrence of accounting restatements in the USA, and researchers also report that litigation concerns have a significant effect on director behavior (Donelson et al, 2022;Liu and Sun, 2022). Ferris et al (2003) report that holding multiple directorships does not increase the likelihood of fraud litigation, and Liu et al (2021) find that directors on multiple boards allocate comparatively more effort to the directorships where they more effectively reduce risk.…”

Section: Influence Of Board Characteristicsmentioning

confidence: 99%

“…Following the enactment of SOX, researchers have found that aspects of corporate governance such as audit committee expertise, board independence and director conservatism are associated with internal control quality (Zhang et al , 2007; Hoitash et al , 2009; Goh, 2009; Liu and Sun, 2022). Pae and Yoo (2001) report that both the auditor’s effort and the client firm’s investment in the quality of the firm’s internal control system affect the informativeness of audit attestation.…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

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Financial statement fraud litigation, material weaknesses, and board characteristics

Manry

Huang

Yan

2023

ARJ

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Purpose The purpose of this study is to investigate whether the likelihood that a firm will face financial statement fraud litigation is affected by the disclosure of internal control material weaknesses (MW) and the “busyness” of a firm’s board of directors. Design/methodology/approach The results are derived from logistic regression models and data are collected from the Audit Analytics database augmented by data from CompuStat, the Stanford Law School website and the SEC Accounting and Auditing Enforcement Releases. The authors also test for endogeneity with a propensity score matching procedure. Findings The authors find that an MW report is strongly associated with the likelihood of subsequent financial statement fraud litigation, and that the influence of entity-level MW on litigation likelihood is stronger than that of account-level MW. Moreover, the number of outside board directorships significantly increases the influence of entity-level MW on the likelihood of litigation, indicating that board of directors’ busyness significantly increases the risk of litigation. Originality/value Previous research notes that board members holding multiple directorships cannot effectively oversee the financial reporting process and, thus, are associated with poorer governance. The authors extend this implication of board busyness to the association between disclosure of MW type and the filing of subsequent litigation alleging financial statement fraud. To the best of the authors’ knowledge, no other research has done so.

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Section: Methods and Datamentioning

confidence: 99%

Section: Influence Of Board Characteristicsmentioning

confidence: 99%

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

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Financial statement fraud litigation, material weaknesses, and board characteristics

Manry

Huang

Yan

2023

ARJ

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“…This monitoring role is supported by Sun and Liu (2011)'s finding that firms tend to be more conservative in accounting methods when they are followed by more analysts than when they are followed by fewer analysts. Consistent with the risk adjustment mechanism, independent directors are more conservative in overseeing financial reporting when they face higher litigation risk due to liability risk (Liu and Sun, 2021). In sum, the manager's implementation of conservatism is sometimes in line with stakeholders by providing shield from competitive attack in the product market, but at times demanded to limit managerial opportunism.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Strategic emphasis and accounting conservatism

Noh

Park²,

Yoo³

2022

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PurposeThe authors examine how a firm's strategic emphasis (SE) on value appropriation (VA) over value creation (VC) is associated with accounting conservatism.Design/methodology/approachTo examine the effect of SE on a firm's adoption of conservative accounting practice, the authors measure SE as advertising expenses minus research and development (R&D) expenses scaled by total assets. The authors rely on the asymmetric timeliness of earnings from Basu (1997) to measure conditional conservatism and investigate how the incremental sensitivity of earnings to negative stock returns varies with the SE.FindingsSE on VA over VC is found to be positively related to accounting conservatism since they want to deter entrants (i.e. competition adjustment) and to accommodate the tighter monitoring over the financial reporting system from stakeholders (i.e. risk adjustment). This argument is also supported by the additional cross-sectional tests based on the different level of market competition and external monitoring environment. In addition, the positive association between SE on VA over VC and accounting conservatism is less pronounced when managerial overconfidence is high.Research limitations/implicationsImplication is that two important decisions (i.e. SE and accounting conservatism) are related with each other since both are to create competitive advantage and to maintain financial stability for a firm, and the relation differs by managerial characteristics.Originality/valueThis study highlights the differential roles of SE in shaping the conservatism in financial reporting and the importance of overconfidence in driving conservative accounting.

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Tenure of independent directors and analysts following: Moderating role of institutional ownership

Fun,

Abdul Wahab,

Ling

et al. 2023

Cogent Business & Management

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The effect of firm-specific litigation risk on independent director conservatism

Cited by 5 publications

References 49 publications

Financial statement fraud litigation, material weaknesses, and board characteristics

Financial statement fraud litigation, material weaknesses, and board characteristics

Strategic emphasis and accounting conservatism

Tenure of independent directors and analysts following: Moderating role of institutional ownership

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