The impacts of federal judge ideology on auditor litigation risk and auditor behavior

Abstract

In this paper, we investigate whether federal judge ideology, ceteris paribus, affects auditor litigation risk and auditor behavior. We find that auditors whose client firms are in jurisdictions dominated by liberal judges are more likely to be sued and make higher payouts to plaintiffs when sued. Furthermore, these client firms are more likely to receive going‐concern opinions and pay higher audit fees. Finally, we find no evidence that the quality of audited financial statements is affected by judge ideology. The evidence documented in this paper indicates that federal judge ideology affects auditor litigation risk and some aspects of auditor behavior.