This study by Hyun Jong Park and colleagues explores how shifting legal responsibility between auditors and their clients affects the quality of financial reporting. The authors examine changes in a legal rule—the Audit Interference Rule (AIR)—that some U.S. states rejected between 2000 and 2015. When states rejected the rule, clients faced more legal risk relative to auditors. In response, they paid higher audit fees and were less likely to issue financial restatements. These findings suggest that when clients have more at stake legally, they demand higher-quality audits, leading to better reporting. The study shows that clients’ incentives can play a stronger role than auditors’ in ensuring financial integrity—offering important implications for legal and regulatory policy.
Relative Liability Exposure for Negligence and Financial Reporting Quality: Evidence from the Audit Interference Rule
