Auditor Reputation Concerns, Legal Liability, and Standards

This paper studies how legal liability due to negligence can weaken or strengthen an auditor's reputation concerns in the client market to provide high audit effort. A negligence liability rule relies on auditing standards to provide a threshold for the level of due care. When the negligence standard is lax, legal liability can weaken the auditor's reputation incentives, with lower audit effort than without legal liability. If the damage payment...