Common Auditors in Corporate Litigation

This study examines how corporate litigation disclosure and outcomes are affected when both litigant counterparties are engaging the same auditor. Using a hand-collected sample from 2013 through 2016, I first find that common audited defendant firms are less likely to provide predictive loss estimates and are more likely to initially disclose lawsuits filed by claimants. These findings are consistent with common auditor incentives to limit scrutiny of biased and asymmetrically beneficial disclosure across their clients. Next, I examine litigation outcomes to assess whether common auditors act as information intermediaries between counterparties, increasing the likelihood of negotiated settlements. I do not find support for this prediction; however, I find that litigation outcome is impacted through common auditors’ role as a monitoring mechanism over settlement agreement terms. This is evidenced by an increased likelihood that agreements include useful non-cash provisions (e.g. licensing agreements, partnerships, lines of credit) that benefit from a mutually shared and trusted agent, monitoring fulfillment and consistent treatment of settlement obligation terms as part of audit procedures, ex-post.

Many thanks to Eric’s dissertation committee: • Committee Chair – Hsihui Chang – Professor – Drexel University • Committee Member: Barbara Grein - Professor – Drexel University • Committee Member: Anthony Curatola - Professor – Drexel University • Committee Member Mark Vargus - Assistant Professor- Drexel University • Committee Member: Xin Dai - Assistant Professor – Drexel University