The Impacts of Auditor''''s Bankruptcy Risk on Audit Quality and Investment

• Main Authors: Hui-Chi Huang, 黃惠琦
• Other Authors: Wu-Chun Chi
• Format: Others
• Language: zh-TW
• Published: 2002
• Online Access: http://ndltd.ncl.edu.tw/handle/01940174572551562399

碩士 === 中原大學 === 會計研究所 === 90 === Abstract The worldwide leading accounting firm, Arthur Andersen, was involved in the Enron scandal and faced with significant bankruptcy risk. This event caused the auditor’s existing environment deeply changed and reputation harmed. Dye(1993) pointed out that auditing plays two important roles in the capital market, the information role and the insurance role, while Schwartz(1997) finds that under “out-of-pocket damage measure” the insurance role may lead investors to over-invest without considering risky assets investment, compared with the social optimal level. Whether the bankruptcy risk faced by the auditor, however, would change the insurance role and the investment level or not is the main concern we are exploring. This study is based on Schwartz(1997) analytical model to stress the impacts of auditor’s bankruptcy risk on audit quality and investment. We find out that under the out-of-pocket damage measure with auditor’s bankruptcy consideration, the economic consequence of over-investment may not still exist in the capital market. In addition, the effort level of auditor would decline in the strict legal regime when bankruptcy risk occurs compared with the social optimal level. Our analysis would provide valuable reference in auditor’s legal liability determination for policy-makers and regulators.