The Effects of Corporate Litigant Counterparties Sharing a Common Auditor

Abstract

This study investigates whether sharing an auditor between corporate litigant counterparties influences their public litigation disclosure choices and litigation outcomes. Consistent with risks and incentives unique to common auditors, I find that defendants are more likely to disclose the existence of legal cases and are less likely to provide predictive loss estimates. In contrast to the settings of other studies, where common auditors have been shown to act as information intermediaries and share private information from one client with another, I do not find evidence to support an effect on litigation outcomes. Overall, the results suggest that common auditors play a “qualified” monitoring role for litigant counterparties, balancing their unique risks and incentives of serving both clients, leading to a nuanced influence on litigation disclosure.