ABSTRACT
This study examines the perception of bank loan officers’ views on auditor use of litigation-related clauses (LRCs) in audit-client engagement letters. The results indicate that loan officers believe management is legally liable for the accuracy of company financial statements. Additionally, we find that bank loan officers perceive that certain LRCs communicate a commitment that company management and its governing board understand their responsibilities to perform honestly and legally. However, bank loan officers’ perceptions of auditor independence, objectivity, and professional skepticism are negatively affected by the usage of LRCs. Finally, findings imply agreement among loan officers with regulators and standard setters that the use of such clauses can adversely affect financial statement reliability.
Keywords
Auditor Liability, Litigation-Related Clause, Auditor Independence, Objectivity, Professional Skepticism