[The accounting profession is witnessing an increase in both the number of lawsuits against auditors and the settlements associated with those suits. As an example, partners with Laventhol & Horwath cited litigation claims against their firm as a major factor in the nation's seventh largest accounting firm's decision to file for bankruptcy protection. Disclosures by Big Eight (now Six) firms show that between 1980 and 1984 nearly 180 million dollars were paid to settle audit-related litigation (Public Accounting Report 1985). An additional cost to firms associated with this litigation is reflected in the rise of malpractice insurance rates. For example, during 1984 the AICPA's professional liability insurance plan doubled its insurance premiums while at the same time increasing deductibles and decreasing coverage (Collins 1985). Auditing firms also suffer indirect costs as a result of increasing litigation. Prior research (St. Pierre and Anderson 1984; Palmrose 1988) examined audit litigation cases and provided descriptions of characteristics of auditors in those cases. Palmrose (1988) suggests that an increasing frequency of litigation against an auditing firm is viewed as a negative signal about the quality of auditing services provided by the firm, thereby impairing its reputation. Two conditions are likely to exist in order for a lawsuit to be filed against an auditor: (1) an allegation of audit failure, and (2) legal action provides a cost-effective alternative for potential plaintiffs. This study hypothesizes that the client's financial condition, asset structure, and sales growth affect the likelihood of erroneous financial statements being issued and that the auditor's ability to detect and willingness to disclose errors are related to the probability of an audit failure. This study also suggests that the greater the market value of the client and the higher the variability of the client's returns, the more likely the auditor of that client will be a target of litigation. A matched-pairs design is used to analyze a sample of companies involved in lawsuits against auditors and a sample of companies matched with the experimental sample on industry and time period. The results provide evidence of an association between pre-audit engagement characteristics of both the client and the auditor, and the subsequent filing of a lawsuit against the auditor. After controlling for industry effects, the ratios of accounts receivable and inventory to total assets, the client's variance of abnormal returns, financial condition, and market value are found to be significantly associated with lawsuits against auditors. A test of the model's predictive ability using various relative error costs and assuming various prior probabilities of auditor litigation results in concluding that model's ability to outperform a naive strategy is sensitive to the parameters selected. However, when realistic priors and error costs are assumed, the model is effective in identifying high-risk audit engagements.]

Reviews the book "Accounting Software and the Microcomputer: A Practical Guide to Evaluation and Implementation," by Irwin Winsten.

The article identifies several client and auditor characteristics as being associated with lawsuits against auditors. The accounting profession is witnessing an increase in both the number of lawsuits against auditors and the settlements associated with those suits. An additional cost to firms associated with this litigation is reflected in the rise of malpractice insurance rates. During 1984 the AICPA's professional liability insurance plan doubled its insurance premiums while at the same time increasing deductibles and decreasing coverage. Auditing firms also suffer indirect costs as a result of increasing litigation. An increasing frequency of litigation against an auditing firm is viewed as a negative signal about the quality of auditing services provided by the firm, thereby impairing its reputation. Two conditions are likely to exist in order for a lawsuit to be filled against an auditor: an allegation of audit failure, and legal action provides a cost-effective alternative for potential plaintiffs.

[An important differentiating attribute of the audit product is believed to be the credibility that the auditor is perceived to bring to an audit engagement. This study uses the context of the initial public offering (IPO) to investigate auditor credibility. It is contended that information asymmetry problems lead to a demand for credible auditors in companies going public. Entrepreneurs have incentives to signal their knowledge of favorable future earnings by selecting reputable auditors. Since there is limited information available on firms going public, employing credible auditors can convey monitoring cost advantages as well. Investment bankers also have a preference for credible auditors since they rely on audited financial statements in certifying the value of the firm and determining whether to underwrite the offering. In the present study, we consider auditor credibility in IPOs from the perspective of the client and the investment banker. If there is an increased demand for auditor credibility at the time of the IPO, there should be a significant number of credibility-increasing auditor changes prior to the offering. Furhter, if the investment banker benefits from having a more credible auditor sign off on statements prepared by the client, this should be reflected in the investment banker's fee structure. The empirical analysis is performed on companies that went public in 1985 and 1986. Relatively few auditor changes are observed prior to the offering. However, among those companies making auditor changes, there is a clear preference for more credible auditors. Logistic regression analysis shows that companies with prestigious investment bankers are more likely to change away from local auditors to more credible CPAs. The type of underwriting arrangement employed is also significant, consistent with an investment banker preference for credible auditors. A regression analysis is conducted, using the 1985 and 1986 IPOs, modeling investment banker compensation as a function of several factors, including type of auditor employed by the issuing firm. In the case of "firm commitment" offerings, the auditor type is found to be significant. Clients seem to be charged a smaller investment banking fee if they are associated with Big Eight auditors. There is no apparent auditor effect in the case of "best efforts" offerings. The evidence generally supports the hypothesis that investment bankers and their clients have a preference for credible auditors for the IPO.]

[Accounting histories have dated the advent of sophisticated cost management from the mid-1880s (Solomons 1952). The scientific management movement is credited with instituting and popularizing cost management techniques. However, it might be suspected that British entrepreneurs of the Industrial Revolution would have developed sophisticated costing techniques earlier, given their significant methodological advances in other economic areas. This article reports the findings from surviving business records of 25 sizeable British industrial firms (mostly in the iron and textile industries) from 1760 to 1850. Substantial evidence of a relatively mature cost management has been found in four major areas of activity: cost control techniques, accounting for overhead, costing for routine and special decision making, and standard costing. Speculations about the motivations for cost management and about specific factors influencing the iron and textile industries are considered. Because the accounting practices of these firms predated the genesis of "the costing renaissance" a century later, our understanding of cost management practices in the Industrial Revolution is augmented by the survey.]

An important differentiating attribute of the audit product is believed to be the credibility that the auditor is perceived to bring to an audit engagement. This study uses the context of the initial public offering (IPO) to investigate auditor credibility. It is contended that information asymmetry problems lead to a demand for credible auditors in companies going public. Entrepreneurs have incentives to signal their knowledge of favorable future earnings by selecting reputable auditors. Since there is limited information available on firms going public, employing credible auditors can convey monitoring cost advantages as well. Investment bankers also have a preference for credible auditors since they rely on audited financial statements in certifying the value of the firm and determining whether to underwrite the offering. In the present study, we consider auditor credibility in IPOs from the perspective of the client and the investment banker. If there is an increased demand for auditor credibility at the time of the IPO, there should be a significant number of credibility-increasing auditor changes prior to the offering. Further, if the investment banker benefits from having a more credible auditor sign off on statements prepared by the client, this should be reflected in the investment banker's fee structure. The empirical analysis is performed on companies that went public in 1985 and 1986. Relatively few auditor changes are observed prior to the offering. However, among those companies making auditor changes, there is a clear preference for more credible auditors. Logistic regression analysis shows that companies with prestigious investment bankers are more likely to change away from local auditors to more credible CPAs. The type of underwriting arrangement employed is also significant, consistent with an investment banker preference for credible auditors. A regression analysis is conducted, using the 1985 and 1986 IPOs, modeling investment banker compensation as a function of several factors, including type of auditor employed by the issuing firm. In the case of "firm commitment" offerings, the auditor type is found to be significant. Clients seem to be charged a smaller investment banking fee if they are associated with Big Eight auditors. There is no apparent auditor effect in the case of "best efforts" offerings. The evidence generally supports the hypothesis that investment bankers and their clients have a preference for credible auditors for the IPO.

Accounting histories have dated the advent of sophisticated cost management from the mid-1880s (Solomons 1952). The scientific management movement is credited with instituting and popularizing cost management techniques. However, it might be suspected that British entrepreneurs of the Industrial Revolution would have developed sophisticated costing techniques earlier, given their significant methodological advances in other economic areas. This article reports the findings from surviving business records of 25 sizeable British industrial firms (mostly in the iron and textile industries) from 1760 to 1850. Substantial evidence of a relatively mature cost management has been found in four major areas of activity: cost control techniques, accounting for overhead, costing for routine and special decision making, and standard costing. Speculations about the motivations for cost management and about specific factors influencing the iron and textile industries are considered. Because the accounting practices of these firms predated the genesis of "the costing renaissance" a century later, our understanding of cost management practices in the Industrial Revolution is augmented by the survey.