financial reporting and auditing under alternative damage rules. accounting review 74(3（财务报告和审计下替代破坏规则。）.pdfVIP

THE ACCOUNTING REVIEW Vol. 74, No. 3 July 1999 pp. 347–369 Financial Reporting and Auditing Under Alternative Damage Apportionment Rules Stephen A. Hillegeist Northwestern University ABSTRACT: This article analyzes the impacts that three alternative damage apportionment rules have on an owner’s financial-reporting decision, an au- ditor’s audit-quality choice, and investors’ pricing decisions within the context of a perfectly competitive securities market and owner solvency constraints. The strategic interactions between the players’ strategies are analyzed within a setting where payoffs are endogenously determined and vary with the damage apportionment rule. These comparisons speak to potential changes resulting from the Private Securities Litigation Reform Act of 1995 which re- placed joint-and-several liability with a proportionate liability rule. The main finding is that the audit failure rate can decrease when there is a switch from a joint-and-several to a proportional liability rule despite the fact that audit quality has also declined. This result occurs when there are strategic inter- actions between the owner’s reporting strategy and the auditor’s quality decision. Key Words: Auditing, Financial reporting, Damage apportionment rules. I. INTRODUCTION he Private Securities Litigation Reform Act of 1995 (U.S. Congress 1995) replaced Tthe long-standing joint-and-several (JS) liability rule with a hybrid proportional li- ability rule (HP). Auditors had lobbied vigorously to eliminate JS liability claiming that they had frequently been included in lawsuits merely because of their ‘‘deep po