An Empirical Study on the Relationship Between Auditor Accountability and Litigation Risk Exposure

Posted: May 28, 2022

• Luca Turner
• Sage Franklin
• Tessa Owens

Abstract

The relationship between auditor accountability and litigation risk exposure represents a fundamental tension in contemporary audit practice. While accountability mechanisms are designed to enhance audit quality and protect stakeholder interests, the litigation environment in which auditors operate has become increasingly complex and potentially counterproductive. This study addresses a critical gap in the auditing literature by examining how varying levels of litigation risk influence auditor behavior, decision-making processes, and ultimately, audit quality outcomes. Traditional auditing research has largely assumed a linear relationship between litigation risk and audit quality, positing that increased litigation exposure motivates auditors to exercise greater care and diligence. However, this perspective fails to account for the behavioral and psychological dimensions of auditor decision-making under pressure. Recent developments in behavioral economics and institutional theory suggest that excessive litigation risk may trigger defensive auditing practices that compromise rather than enhance audit quality. Our research builds upon the foundational work of Ahmad, Nadeem, and Saeed (2019) in fraud risk management, extending their insights into the domain of litigation risk dynamics. We introduce several novel conceptual frameworks, including the accountability elasticity model and the multidimensional litigation risk index, to provide a more nuanced understanding of how auditors respond to litigation pressures. The study employs a mixed-methods approach that combines quantitative analysis of audit engagement data with qualitative insights from auditor interviews and case studies.