Litigation Risk and Individual Auditor Turnover

This study empirically examines the impacts of litigation risk exposures on an individual auditor’s turnover decision. While prior studies focus on investigating how litigation risk exposures affect CPA firm’s reporting and pricing behaviors, little is known about the influences of such risk exposures on an individual auditor’s employment preference. As human capital is the key asset of a CPA firm which constitutes the overall audit quality supplied to clients, we examine if there is any concern on litigation risks in an individual auditor’s turnover decisions. Using a sample of Chinese listed company audits where the individual signatory auditors’ names are required to be disclosed, we hypothesize and find that signatory auditors who are affiliated with CPA firms with high litigation risk exposures are more likely to switch to other CPA firms. Our further analyses show that after the turnover, signatory auditors are likely to supply higher audit quality. Taken together, our research demonstrates the importance of litigation risks in affecting individual auditor’s turnover decision, where our findings will be helpful for academics, practitioners, and regulators to better understand the workplace decisions of professional accountants and associated audit quality.