Audit Firm Characteristics and Litigation Risk in Nigeria

Abstract

This study investigates the relationship between audit firm characteristics and litigation risk in Nigeria. The population of the study comprises all the audit firms in audit practice in Nigeria that are registered with the Institute of
Chartered Accountants of Nigeria (ICAN) as at 31st December, 2014. Using the judgmental sampling technique, 20 Nigerian audit firms were chosen. From the 20 selected audit firms, a final sample of 156 respondents (representing 78% response rate) who have been in audit practice for over 3 quinquennia was drawn. Data was estimated using ordinary least squares regression method. Audit fee and litigation were positive and statistically significant. Whereas audit tenure and audit firm size, introduced into the model as control variables, were statistically insignificant, non-audit fee was negatively related to litigation risk. Against the background of the findings, we recommend that partners in audit firms should always endeavour to evaluate the attributes of their firms, or possibly link those attributes to the risk of being sued for a deficient work, as understanding the link between audit-firm characteristics and litigation risk would allow firms to further reduce litigation risk through practice management. The study noted that the demise of Arthur Andersen (one of the big 5 audit firms) can be largely attributed to the partners’ inability to identify changes within their firm that increased the risk of audit failure and litigation to an unreasonable level.