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Frivolous Litigation in Auditing
Chi - Wen Jevons Lee, Tulane University & Zhejiang University
Hua Lee, Chinese University of Hong Kong
Taychang Wang, National Taiwan University
ABSTRACT. While auditors often complain that they are subject to frivolous litigation, few can clearly prove frivolity. This article develops a model of the strategic legal interactions between auditors and investors that provides for an analysis of frivolous legal actions. We show that a separating equilibrium exists whereby the auditor differentiates the investor’s type from the latter’s settlement offer. Hence, frivolous litigation is not consistent with this equilibrium. By contrast, frivolous litigation can arise in a pooling equilibrium, which results from commonly observed exogenous settlements. Our analyses provide policy implications for civil reform relating to the auditing profession.
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