Question

Describe the elements in the litigation environment that provide incentives to pursue litigation against audit firms

Describe the elements in the litigation environment that provide incentives to pursue litigation against audit firms

Homework Answers

Answer #1

Incentives to pursue litigation against audit firms include:

  • Class action suits and associated user awareness of the possibilities and rewards of litigation.
  • Contingent-fee-based compensation for law firms, especially in class action suits.
  • A misunderstanding (expectations gap) by some users that an unqualified audit opinion represents an insurance policy against investment losses.
  • Liability doctrines that include joint and several liability statutes permitting a plaintiff to recover the full amount of a settlement from an external auditing firm, even though that firm is found to be only partially responsible for the loss (often referred to as the deep-pocket theory; i.e., sue those who can pay).
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