AUDITORS’ PUBLIC OFFERING EXPERIENCE AND LAWSUITS

Abstract

Prior literature suggests that public offering clients of Big 4 auditing firms are more likely to get sued due to their “deep pockets” which might trigger the filing of lawsuits. However, it is not clear whether variation in auditor knowledge and experience among Big 4 audit offices might affect the litigation risk. In this paper, I examine whether auditor experience in public offerings measured at the audit office level is associated with lawsuit incidence related to initial and secondary public offerings. Using a sample of U.S. IPOs and SEOs audited by Big 4 audit firms, I find that IPO clients of the auditors with higher IPO experience are less likely to get sued. Similarly, I find that SEOs audited by Big 4 offices with higher SEO experience are associated with lower lawsuit incidence. I also investigate whether auditors might use their SEO and IPO experience to mitigate litigation risk interchangeably for IPO and SEO audits, respectively. I find that SEO experience is negatively associated with lawsuit incidence in the IPO sample, but that association disappears after controlling for auditor IPO experience. However, I do not find any association between auditor IPO experience and SEO-related lawsuits. I also examine the effect of auditor IPO and SEO experiences on dismissal rate among lawsuits related to IPOs and SEOs, respectively. My results suggest that the IPO experience of auditors has a positive impact on the dismissal rate of lawsuits related to IPOs. However, I do not find a significant association between the SEO experience of auditors and the dismissal rate of SEO-related lawsuits.