Issue 3

Volume 2 JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY
March 1992

Introduction: Auditors’ Legal Liability in the United States

Bala V. Balachandran
J.L. Kellogg Distinguished Professor of Accounting and Information Systems at Northwestern. I was asked by Professor Dan Spulber, editor of the Journal of Economics & Management Strategy, to organize a special edition of the journal based on “The Liability Crisis in the U.S. and Its Impact on Accounting,” a conference sponsored by the Accounting Research Center, J.L. Kellogg Graduate School of Management, Northwestern University, which was held April 7, 1993. All the presenters and panelists were requested to provide a version of their views for publication. Also included is one refereed research paper that is relevant to the main theme of fees and legal liabilities of the “Big 6” auditing firms. The author expresses his sincere appreciation to Professor Dan Spulber and MIT Press for providing this opportunity and to Ms. Betty Eccher for improving the presentation of this issue.

Audit Services and Fees of Large Accounting Firms

Bala V. Balachandran and Daniel Simon
In the audit literature, it was postulated that audit firms are differentiated due to their quality and, thus, the fees charged are a function of quality. We hypothesize that this may lead to audit firm specialization in different amounts of auditing, leading to a differential audit fee structure. This hypothesis is empirically tested by using a very large sample of audit fees paid to then Big Eight auditors. The results are consistent with the hypothesis in that three Big Eight auditors are observed to charge significantly different fees when compared with the other firms.

Auditors’ Liability: Opportunities for Research

William R. Kinney Jr.
Charles and Elizabeth Prothro Regents Chair in Business, Graduate School of Business, gratefully acknowledges the helpful comments of John Allison, John Hill, Eric Hirst, Ross Jennings, Lisa Koonce, Roger Martin, Zoe-Vonna Palmrose, John Robinson, George Sidel, Reed Smith, and, especially, Robert Mednick.

The Future of the Accounting Profession

J. Michael Cook
The litigation crisis in this country is a subject of great importance to the chief executive officers of public uccounting firms. 1 will first address the problem's magnitude and its source and then speculate on the developments we might expect in the future. Like all forecasts, mine will certainly be wrung. I hope that my degree of error on the pessimistic side will be considerable.

The Liability Crisis: Audit Failures or Accounting Principles Failures?

Walter P. Schuetze
The Securities and Exchange Commission, as a matter of policy, disclaims any responsibility for any private publication or statement by its employees. The views expressed herein are those of Mr. Schuetze and do not necessarily reflect the views of the Commission or the other staff of the Commission.

Discussion: Limiting Auditors’ Liability

Ronald A. Dye
This article is based on the author's working paper, “Incorporation and the Audit Market,” Northwestern University, June 1993, and a transcript of a speech given at the conference, “The Liability Crisis in the U.S. and its Impact on Accounting,” on April 7, 1993, sponsored by the Accounting Research Center at Northwestern University.