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Auditing Standards, Legal Liability, and Auditor Wealth, Journal of Political Economy

Abstract

There has been an enormous increase in auditing and accounting standards and in litigation against auditors; This paper examines some of the consequences of these changes by developing a model of the audit market relating auditors' liability to auditing standards. The paper demonstrates how equilibrium audit fees depend on both the informational value of the audit and the option value of the claim financial statement users have on the auditor's wealth in the event the audit is determined to have been substandard. Auditors' attitudes toward and responses to auditing standards are studied, and characteristics of optimal liability rules are evaluated.

Type

Article

Author(s)

Ronald A. Dye

Date Published

1993

Citations

Dye, A. Ronald. 1993. Auditing Standards, Legal Liability, and Auditor Wealth. Journal of Political Economy. 101(5): 887-914.

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