TY - JOUR
T1 - The Impact of Legal Liability Regimes and Differential Client Risk on Client Acceptance, Audit Pricing, and Audit Effort Decisions
AU - Gramling, Audrey A.
AU - Bailey, Andrew D.
AU - Schatzberg, Jeffrey W.
AU - Zhang, Hao
N1 - Funding Information:
We gratefully acknowledge the financial support provided to us for this project by KPMG Peat Marwick Research Foundation through the Research Opportunities in Auditing program. We especially appreciate comments received from Ron King (the referee), as well as workshop participants at the University of Kentucky, Wake Forest University, and participants at the 1997 AAA Annual Meeting, and many of our colleagues including Gary Braun, Mike Calegari, Neil Fargher, Troy Hyatt, Sanjay Kallapur, Bill Kinney, Jane Morton, Pat Myers, Amnon Rapoport, Brad Reed, Brian Shapiro, Mark Taylor, Mark Trombley, Cyndi Vines, R. S. O. Wallace, David Wallin, Mike Wilkins, and Mark Zimbelman. 10 1998 13 4 437 460 © 1998 SAGE Publications 1998 SAGE Publications
PY - 1998/10
Y1 - 1998/10
N2 - This study uses experimental methods to examine client acceptance, auditor pricing and effort decisions for clients of varying risk under two legal rules, joint and several liability, and proportionate liability. We predict greater availability of audit services for high-risk clients, lower audit prices, and lower audit effort under proportionate liability relative to joint and several liability. Our experimental evidence does not strongly support predicted prices due to underpricing behavior, but prices do reflect risk differences across client groups for both liability regimes. The results also exhibit some support for the predictions that auditors select low effort for the lowest-risk clients, and a lower effort level under proportionate liability relative to joint and several liability for moderate-risk clients. As predicted for the highest-risk clients, high effort is selected under proportionate liability, and there is some evidence of a substantial reduction in contracting under joint and several liability.
AB - This study uses experimental methods to examine client acceptance, auditor pricing and effort decisions for clients of varying risk under two legal rules, joint and several liability, and proportionate liability. We predict greater availability of audit services for high-risk clients, lower audit prices, and lower audit effort under proportionate liability relative to joint and several liability. Our experimental evidence does not strongly support predicted prices due to underpricing behavior, but prices do reflect risk differences across client groups for both liability regimes. The results also exhibit some support for the predictions that auditors select low effort for the lowest-risk clients, and a lower effort level under proportionate liability relative to joint and several liability for moderate-risk clients. As predicted for the highest-risk clients, high effort is selected under proportionate liability, and there is some evidence of a substantial reduction in contracting under joint and several liability.
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U2 - 10.1177/0148558X9801300404
DO - 10.1177/0148558X9801300404
M3 - Article
AN - SCOPUS:84990358740
SN - 0148-558X
VL - 13
SP - 437
EP - 460
JO - Journal of Accounting, Auditing & Finance
JF - Journal of Accounting, Auditing & Finance
IS - 4
ER -