خطر شکایت های قانونی و حسابرسی هزینه: شواهد از شرکت های بریتانیا کراس لیست در بازار آمریکا

Two ingredients necessary to examine the relation between litigation risk and audit pricing are (a) a litigious legal environment, and (b) publicly disclosed auditor remuneration. We combine both ingredients by focusing on UK firms offering to sell their securities publicly in the United States. We find that UK auditors charge higher fees for their services when their clients access US, but not non-US, capital markets. Further, we show that the higher fees cannot be fully explained by the SEC's extensive disclosure requirements. Rather, these findings are consistent with audit fees reflecting risk differences across liability regimes.

The auditing profession's vulnerability to negligence lawsuits has been described as a crisis. The profession's aggregate liability exposure, which exceeds $30 billion (Arens and Loebbecke, 1997), indicates the seriousness of the problem. Besides potential liability payments, litigation against an audit firm can damage its reputation for the quality of its services (Palmrose, 1988). Litigation claims are also associated with auditor decisions to leave the profession (Dalton et al (1994) and Dalton et al (1997)), and with decisions to downsize or declare bankruptcy. Furthermore, Menon and Williams (1994) suggest that investors price securities in a way that reflects their right to recover potential losses through auditor litigation. This threat of litigation makes it incumbent upon auditors to continually assess their exposure to lawsuits and to incorporate that assessment into the planning and pricing of audit services. Audit fees should, therefore, be sensitive to litigation risk differences across client groups. Yet, empirical evidence linking litigation risk to audit fees, especially from countries that require the public disclosure of audit fees, is weak. For example, from Australia, Francis (1984) finds no support, Francis and Stokes (1986) find very limited support, while Beatty (1993) and Craswell and Francis (1999) find evidence mostly consistent with the proposition that audit fees are litigation-risk adjusted. Results from the UK (Chan et al., 1993; Pong and Whittington, 1994), Canada (Chung and Lindsay, 1988; Anderson and Zeghal, 1993), New Zealand (Firth, 1985; Johnson et al., 1995), Hong Kong (Gul and Tsui, 1998), and Norway (Firth, 1997) exhibit little or no support, while results from the US (Simunic, 1980; Palmrose, 1986a; Simunic and Stein, 1996) generally support the litigation risk-audit fee hypothesis. On balance, as observed by Simunic and Stein (1996), no generalizations can be made about non-US evidence. The inability of previous research to find evidence appears to be due mostly to a lack of a large enough risk component in the audit fees. There are two components necessary to comprehensively address the litigation risk-audit fee hypothesis empirically: (a) public disclosure of auditor remuneration, and (b) a litigious legal environment. The legal environment in the US is relatively litigious, but US companies are not required to publicly disclose auditor remuneration. Conversely, countries that require the disclosure of auditor remuneration (e.g., the UK, Hong Kong, and Australia) have a relatively mild litigation environment. Non-US companies offering to sell their securities in the United States are, however, exposed to liability under US securities laws. Additionally, case law suggests that the antifraud provisions of the Securities Exchange Act of 1934 have transnational jurisdiction, applying, in particular, to non-US auditors. Thus, when foreign firms offer to sell their securities publicly in the US, their auditors are potentially exposed to liability under US securities laws. The attendant, above-average litigation risk should motivate the auditors to (a) implement measures (increase effort) in defense against the increased likelihood of future litigation (Simunic, 1980; Simunic and Stein, 1996); and/or (b) charge an insurance premium to cover possible future litigation losses (Pratt and Stice, 1994; Gramling et al., 1998). In either case, auditor remuneration should increase. Foreign firms offering to sell their securities publicly in the US thus provide an ideal opportunity to re-visit and test the litigation risk-audit fee hypothesis. In the paper, we examine whether, and find that, auditors of UK firms charge higher fees for their services when their clients access US, but not non-US, capital markets. The higher fees can be due to either additional work and/or a risk premium as a result of the higher risk of litigation in the US. Our results show that the higher fees cannot be fully explained by the relatively extensive disclosure requirements mandated by the US securities laws, including the requirement to conform or reconcile national accounts with US Generally Accepted Accounting Principles. As such, our findings suggest that audit fees reflect risk differences across liability regimes. In the next section, we discuss the theory. Section 3 establishes the credibility of an increased risk of litigation against auditors stemming from an US listing. Section 4 details the research design. Section 5 describes the sample and provides descriptive statistics, while the results are presented and discussed in Section 6. The final section contains a summary and conclusions.

Case law suggests that the antifraud provisions of the Securities Exchange Act of 1934 have transnational jurisdiction, applying to non-US auditors. Thus, when foreign firms offer to sell their securities in the US, their auditors are potentially exposed to liability under US securities laws. We hypothesize that the attendant, above-average litigation risk should motivate the auditors to (a) increase effort or implement measures in defense of the increased likelihood of future litigation; and/or (b) charge an insurance premium to cover possible future litigation losses. In either case, auditor remuneration should increase. Consistent with this hypothesis, we find that UK auditors charge higher fees for their services when their clients access US, but not non-US, capital markets. Further, we demonstrate that the higher audit fees cannot be fully explained by the accentuated disclosure requirements mandated by US securities laws. Our findings are important from two perspectives. First, a significant element of the liability crisis facing the auditing profession is the link between litigation risk and audit fees. In particular, to what extent are the costs of auditor litigation shifted to the auditee? While theory and intuition tell us that audit fees should be risk adjusted, it has been difficult to empirically test this prediction because the US does not require auditor remuneration to be publicly disclosed. Conversely, countries that do require the disclosure of auditor remuneration tend to have a relatively benign litigation environment. By examining UK companies trading on US markets, we are able to examine the effects of a highly litigious environment on publicly disclosed audit fees. Our results are generally consistent with the theory underlying Simunic (1980) and Simunic and Stein (1996) that audit fees reflect risk differences across liability regimes. Second, to evaluate the feasibility of a potential foreign listing decision, corporate managers need to identify and quantify the associated incremental costs and benefits. The widespread perception that accessing US capital markets exposes the firm to above-average litigation risk seems valid, notwithstanding the passage of the Private Securities Litigation Reform Act in 1995. Future studies may attempt to examine and quantify how firms protect themselves against this litigation risk and the costs thereof. We document that UK auditors charge significantly higher fees for their services when their clients access US capital markets, and attribute this premium mostly to the US litigation environment. We estimate this premium to be in the neighborhood of 20%. Corporate managers need to consider these incremental cash outflows in evaluating a potential US versus non-US foreign listing decision. We also find that the audit fees for UK firms trading OTC are not significantly different from those for exchange-listed UK firms, including those listed on the NASDAQ. This information should assist corporate managers in making the choice among Levels I, II, or III ADRs.