Evidence on auditor risk-management strategies before and after The Private Securities Litigation Reform Act of 1995

Abstract

This study provides evidence that auditors adopted risk-management policies in the early 1990s in order to reduce their exposure to legal liability. Specifically, there is evidence that their clienteles became less risky and evidence of more conservative auditor reporting policies by non-Big Six auditors (but not by Big Six auditors). The auditor's legal exposure was reduced under The Private Securities Litigation Reform Act of 1995, and there is evidence that risk-management policies were relaxed after 1994, resulting in riskier clienteles and less conservative reporting strategies for both Big Six and non-Big Six auditors. The study is important in documenting that alternative legal liability regimes can affect auditor incentives and behaviour. © City University of Hong Kong.