Client pressure and legal liability on auditors

The first chapter studies whether it is socially optimal to restrict client pressure on the auditor, and the socially optimal level of auditors' legal liability. I address these issues by examining the relationship between client pressure/legal liability and the economy's productive efficiency. The opposing forces of client pressure and legal liability influence the auditor's audit intensity and attestation, and consequently the informativeness of audit reports. Audit reports in turn affects investors' investment decisions.; I show that low (high) client pressure relative to legal liability induces the conservative (aggressive) attestation. In the conservative (aggressive) attestation case, higher (lower) client pressure relative to legal liability induces a higher audit intensity, which makes audit reports more informative. Further, the client has an endogenous demand for informative audit reports.; Therefore, restricting client pressure might eliminate the aggressive attestation and constrain audit intensity. Finally, the socially optimal legal liability has an upper and a lower bound.; The second chapter studies opinion shopping, auditor replacement and capital market pricing of the firm. I show that the capital market views auditor replacement as bad news; further, replacing an aggressive auditor is viewed as worse news than replacing a conservative auditor. Given the audit intensity, the audit report by the replacement auditor is interpreted by the market as (weakly) worse than the same report by the initial auditor.; I show that given the quasi-rent, a conservative replacement auditor's audit intensity is lower than a conservative initial auditor's while an aggressive replacement auditor's audit intensity is higher than an aggressive initial auditor's.; I further show that good firms do not fire an aggressive auditor or a conservative auditor who proposes a favorable report, but fire a conservative auditor who proposes an unfavorable report; bad firms do not fire an aggressive auditor but fire a conservative auditor. Replacing firms switch from inducing the conservative attestation by the incumbent auditor to inducing the aggressive attestation by the replacement auditor. I also derive low-balling and fee cutting.