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Rachel Schwartz, Ronald King (1996)
The Private Securities Litigation Reform Act of 1995: A Discussion of Three Provisions
R. Dye (1995)
Incorporation and the audit marketJournal of Accounting and Economics, 19
R. Dye (1993)
Auditing Standards, Legal Liability, and Auditor WealthJournal of Political Economy, 101
Nahum Melumad, Lynda Thoman (1990)
On Auditors And The Courts In An Adverse Selection SettingJournal of Accounting Research, 28
Mednick Mednick, Peck Peck (1994)
Proportionality: A much‐needed solution to the accountant's legal liability crisisValparaiso University Law Review, 23
Journal of Accountancy, 174
B. Balachandran, Nandu Nagarajan (1986)
Imperfect information, insurance, and auditors' legal liability*Contemporary Accounting Research, 3
V. Narayanan (1994)
An Analysis of Auditor Liability RulesJournal of Accounting Research, 32
Mednick Mednick (1987)
Accountants' liability: Coping with the stampede to the courtroomJournal of Accountancy
J. Nelson, J. Ronen, L. White (1988)
Legal Liabilities and the Market for Auditing ServicesJournal of Accounting, Auditing & Finance, 3
Joseph Carcello, Zoe-Vonna Palmrose (1994)
Auditor Litigation and Modified Reporting on Bankrupt ClientsJournal of Accounting Research, 32
Major accounting firms in the United States have singled out elimination of joint and several liability as one of the most needed legal reforms in the country. The recent legislation of the Private Securities Litigation Reform Act of 1995 replaced joint and several liability with proportionate liability. This paper develops a simple model to analyze the economic consequences of such a change in the legal environment facing public accountants. In particular, we examine the incentive effects induced by the proportionate liability rule on the auditor's effort and financial statement users' litigation decisions. Our analysis demonstrates that replacing joint and several liability with proportionate liability can decrease the equilibrium audit effort, lawsuit probability, market price of the firm, and audit fee. More important, even though the proportionate liability rule reduces the equilibrium audit effort, we show that it can actually increase social welfare.
Contemporary Accounting Research – Wiley
Published: Dec 1, 1998
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