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Article: Scope of auditors' liability, audit quality, and capital investment

TitleScope of auditors' liability, audit quality, and capital investment
Authors
KeywordsAudit Quality
Auditors' Liability
Double Moral Hazard
Sequential Borrowing
Underinvestment
Issue Date2002
PublisherSpringer New York LLC. The Journal's web site is located at http://springerlink.metapress.com/openurl.asp?genre=journal&issn=1380-6653
Citation
Review Of Accounting Studies, 2002, v. 7 n. 1, p. 97-122 How to Cite?
AbstractOne of the fundamental issues in the discussion of auditors' liability is to whom auditors should be held liable for ordinary negligence under common law. Three judicial viewpoints prevail: the restrictive privity approach, the more liberal Restatement approach, and the most liberal foreseeability approach. To compare these three approaches from an efficiency perspective, this paper develops a model that features an owner-managed firm, an independent auditor, a continuum of unrelated lenders, and an impartial court. Double effort-incentive problems appear for the firm and the auditor. The firm has an additional incentive problem due to the sequential nature of its borrowing. This paper shows that the effort-incentive problem and the sequential borrowing problem of the firm render unambiguous improvements in audit effort/quality, capital investment, and social welfare as the judicial approach governing the scope of auditors' liability becomes more conservative. © 2002 Kluwer Academic Publishers.
Persistent Identifierhttp://hdl.handle.net/10722/177738
ISSN
2015 Impact Factor: 1.513
2015 SCImago Journal Rankings: 2.039
SSRN
References

 

DC FieldValueLanguage
dc.contributor.authorChan, DKen_US
dc.contributor.authorWong, KPen_US
dc.date.accessioned2012-12-19T09:39:45Z-
dc.date.available2012-12-19T09:39:45Z-
dc.date.issued2002en_US
dc.identifier.citationReview Of Accounting Studies, 2002, v. 7 n. 1, p. 97-122en_US
dc.identifier.issn1380-6653en_US
dc.identifier.urihttp://hdl.handle.net/10722/177738-
dc.description.abstractOne of the fundamental issues in the discussion of auditors' liability is to whom auditors should be held liable for ordinary negligence under common law. Three judicial viewpoints prevail: the restrictive privity approach, the more liberal Restatement approach, and the most liberal foreseeability approach. To compare these three approaches from an efficiency perspective, this paper develops a model that features an owner-managed firm, an independent auditor, a continuum of unrelated lenders, and an impartial court. Double effort-incentive problems appear for the firm and the auditor. The firm has an additional incentive problem due to the sequential nature of its borrowing. This paper shows that the effort-incentive problem and the sequential borrowing problem of the firm render unambiguous improvements in audit effort/quality, capital investment, and social welfare as the judicial approach governing the scope of auditors' liability becomes more conservative. © 2002 Kluwer Academic Publishers.en_US
dc.languageengen_US
dc.publisherSpringer New York LLC. The Journal's web site is located at http://springerlink.metapress.com/openurl.asp?genre=journal&issn=1380-6653en_US
dc.relation.ispartofReview of Accounting Studiesen_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.rightsThe original publication is available at www.springerlink.com-
dc.subjectAudit Qualityen_US
dc.subjectAuditors' Liabilityen_US
dc.subjectDouble Moral Hazarden_US
dc.subjectSequential Borrowingen_US
dc.subjectUnderinvestmenten_US
dc.titleScope of auditors' liability, audit quality, and capital investmenten_US
dc.typeArticleen_US
dc.identifier.emailChan, DK: dkchan@hkucc.hku.hken_US
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_US
dc.identifier.authorityChan, DK=rp01046en_US
dc.identifier.authorityWong, KP=rp01112en_US
dc.description.naturepostprinten_US
dc.identifier.doi10.1023/A:1017983614986-
dc.identifier.scopuseid_2-s2.0-33845606339en_US
dc.identifier.hkuros67950-
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-33845606339&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume7en_US
dc.identifier.issue1en_US
dc.identifier.spage97en_US
dc.identifier.epage122en_US
dc.publisher.placeUnited Statesen_US
dc.identifier.ssrn277931-
dc.identifier.scopusauthoridChan, DK=7402216890en_US
dc.identifier.scopusauthoridWong, KP=7404759417en_US

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