An Analysis of Auditor Litigation and Audit Service Quality.

Abstract ABSTRACT: This study compares litigation activities of independent auditors to assess litigation as a means for making quality distinctions among auditors. The study provides a framework suggesting auditors With relatively low (high) litigation activity represent higher (lower) quality suppliers. The empirical analysis examines a sample of legal cases (n =472) and resolutions for these cases (if available, n = 183). The cases involve audit-related litigation against both Big Eight and large non-Big Eight firms during 1960-1985. The results indicate that nonBig Eight firms as a group have higher litigation activity than Big Eight firms. This result is consistent with existing research supporting the Big Eight as quality-differentiated auditors. Comparisons among Big Eight firms reveal some significant differences. However, identification of particular Big Eight firms as low (high) litigation activity auditors appears sensitive to the type of analysis.