تصمیم سازی حسابرس در محیط های مختلف شکایت های قانونی : قانون اصلاحی دادخواهی اوراق بهادار خصوصی، گزارش حسابرسی و اندازه شرکت های حسابرسی

The adoption of the Private Securities Litigation Reform Act of 1995 had a marked impact on public accounting firms in the US by significantly reducing their liability exposure with respect to litigation involving publicly traded audit clients. This shift in the litigation environment of public accounting firms has been argued to have been manifest in changed auditor decisions regarding their audit clients. While this tort reform legislation was intended to benefit all audit firms, recent research suggests that it may have differentially affected auditors based on audit firm size. In this study, we examine the impact of the change in litigation environment ushered in by the Private Securities Litigation Reform Act and Big 6 membership on going-concern modification decisions for companies entering bankruptcy before and after the new legislation. Our findings, based on analyses of 694 financially stressed firms that entered into bankruptcy during the period 1991 to 2001, indicate that the likelihood of a going-concern modified opinion decreased significantly after the Private Securities Litigation Reform Act, and the change was particularly pronounced for the Big 6 audit firms. These results suggest that this important litigation reform had a significant effect on auditor decision-making, and that it had more of an effect on audit decisions of the Big 6 firms in comparison to the non-Big 6 firms.

The Private Securities Litigation Reform Act of 1995 (hereafter Reform Act) was enacted into law late in December 1995, and significantly altered the litigation environment for public accounting firms in the US. Some observers of the public accounting profession have argued that prior to 1995 the litigious environment faced by accounting firms was detrimental to the public accounting profession and created a drag on economic growth ( Gottlieb and Doroshow, 2002). After a concerted effort on the part of the profession, public accountants were afforded significant tort liability relief with the passage of the Reform Act. It has been argued that the Big 6 audit firms were the primary beneficiaries of the litigation relief brought forth by the Reform Act, and that the effects of the Reform Act on auditor decision-making may be more pronounced for the Big 6 firms than for the non-Big 6 ( Johnson et al., 1995 and Coffee, 2002). To examine the possible effects to different sized audit firms due to the adoption of the litigation reduction provisions of the Reform Act, in this study we examine whether the Reform Act produced a differential effect on the Big 6 firms compared to non-Big 6 firms with respect to final audit reporting decisions. Specifically, we examine whether the Big 6 audit firms were differentially less likely to render going-concern modified audit reports to subsequently bankrupt clients in comparison to the non-Big 6 audit firms after the enactment of the Reform Act. In a recent study, Lee and Mande (2003) find that the Big 6 audit firms were differentially less conservative following the enactment of the Reform Act in allowing their clients to report significantly higher income-increasing discretionary accruals than allowed by non-Big 6 firms for their clients after the Reform Act. Lee and Mande (2003) argue that their results are consistent with the view that because of the significantly greater “wealth at risk” of the Big 6 audit firms, the impact of the reduction in litigation exposure brought about by the Reform Act was more pronounced for the Big 6 firms than for the non-Big 6 firms. The evidence from Lee and Mande (2003) about the differential effect of the Reform Act’s effect on different sized audit firms’ decision-making is indirect, since they examine the accounting accruals of the audit firms’ clients. In contrast, our study provides direct evidence about the differential impact of the Reform Act on auditors’ decisions by examining audit opinions. Motivation for this research comes from the renewed focus on audit firm decision-making in recent regulatory and legislative actions (SEC, 2000, SEC, 2002, US Senate, 2002, Nelson, 2002, Tie, 2003 and Williams, 2003), the sustained public interest in audit reporting on bankrupt companies (Weil, 2001, Bryan-Low, 2002 and Breeden, 2002), and the continued importance of the Reform Act to the public accounting profession ( Kahn and Metcalfe, 1996, King and Schwartz, 1997, Chan and Pae, 1998 and Latham and Linville, 1998). Examining audit firm behavior under different tort liability regimes and their reaction to national policy changes is warranted in order to assess the actual impact of these important legislative events on the affected parties, as well as assist in deriving more accurate estimates of the impact of future legislative changes on audit firms. In this study we examine the prior audit opinions for 694 financially stressed companies that entered into bankruptcy during the period 1991 to 2001. After controlling for other audit report related factors, we find that the Big 6 firms were significantly less likely to have issued a prior going-concern modified audit opinion after the Reform Act compared to their prior reporting decisions, but we do not find a similar reduction in the propensity of non-Big 6 firms to issue a modified audit opinion in the post-Reform Act period. This evidence is consistent with the findings of Lee and Mande (2003), and supports the suggestion that while the Reform Act ushered in a less hostile litigation environment in the US, and even though it was beneficial for all public accounting firms auditing publicly traded clients due to its litigation reduction provisions, it was more important for, and had a greater impact on, the Big 6 audit firms in comparison to the non-Big 6 audit firms.

The enactment of the Private Securities Litigation Reform Act of 1995 had a marked impact on the legal environment of public accounting firms in the US. This shift in the litigation environment has been argued to have been manifest in changed auditor decisions regarding their publicly traded audit clients. In this study we examine whether the changed litigation environment following the Private Securities Litigation Reform Act had a differential effect on the reporting decisions of both the Big 6 and non-Big 6 audit firms. Our analysis of audit firm going-concern modification decisions on companies that filed for bankruptcy in the period from 1991 to 2001 presents evidence that the changed litigation environment ushered in by the Reform Act significantly affected the reporting decisions of the Big 6 audit firms but not the non-Big 6 audit firms. Specifically, we find that Big 6 firms became less conservative following the adoption of the Reform Act as reflected in their lower propensity to issue going-concern modified audit opinions, while the non-Big 6 firms exhibited no such change in reporting propensities. Our additional tests indicate that the Big 6 firms report more similarly to the non-Big 6 firms after the Reform Act than prior to its adoption. Further, our results are robust to various partitions of our sample companies, additional controls for reducing the effect of possible changes in overall client risk portfolios over our examination period, and the examination of different transition periods for this important legislation. While our study presents consistent evidence with respect to changes in audit reporting decisions of the Big 6 firms after the Reform Act, we have examined only reporting decisions immediately preceding client bankruptcies (i.e., type II reporting errors). It also appears worthwhile to examine if the probability of going-concern modified opinions for subsequently viable companies (i.e., type I reporting errors) have differentially changed between Big 6 and non-Big 6 firms in the post-Reform Act period. Receiving a going-concern modified audit opinion, particularly if the company remains viable, also imposes costs on clients, auditors, and financial statement users ( Geiger et al., 1998 and Carcello and Neal, 2003). The examination of these reporting decisions would also contribute to our knowledge of the effect of the Reform Act on audit firm reporting behavior under different liability regimes. Another fruitful avenue for research would be to examine the impact of the Reform Act and audit firm size on other types of audit decisions, particularly those related to client acceptance and retention decisions (e.g., Gramling et al., 1998). In our study we find a significant effect in our sensitivity tests between the ratio of bankruptcies-to-clients (BKTRATIO) and a firm’s going concern reporting decisions. Additional analyses of this ratio reveal that it was significantly higher for the Big 6 firms than the non-Big 6 firms both before and after the Reform Act, as well as significantly increased for both sized firms following the Reform Act (p < 0.001). An interesting avenue for future research would be to further explore these differences and possible changes in client portfolios (measured in different ways) in an effort to assess whether the Reform Act encouraged firms of different sizes to alter their portfolio of clients in response to the changed litigation environment. While we find similar changes across time and firm size with respect to bankruptcy ratios, a more directed study appears warranted based on our tentative findings. Our results support the argument that while the Reform Act may have provided important litigation relief to the public accounting profession in general, the Big 6 audit firms appear to have been the greatest beneficiaries and were affected more than non-Big 6 firms ( Coffee, 2002 and Lee and Mande, 2003). Our findings bolster the argument that this substantial change in tort policy in the US that reduced the litigation exposure of auditors of public companies significantly affected only the largest accounting firms’ reporting decisions. An important public policy issue is whether national legislative changes or tort reforms should be implemented that have differential effects on different sized audit firms, or whether these effects are simply the expected result of reforms necessary to balance appropriate legal recourse for damaged parties and yet ensure adequate auditing of all publicly traded companies.