Auditors and the post-2002 litigation environment

In the wake of the disclosure of Enron and WorldCom and other dramatic financial reporting frauds, the Sarbanes–Oxley Act was passed on July 30, 2002. Thus, 2002 was a watershed year for auditors. Audits performed after the passage of Sarbanes–Oxley began to be reflected in litigation filed in 2003. Analysis of 1169 lawsuits filed between 2001 and 2008 finds that auditor litigation severity decreased in the lawsuits filed after 2002. Analysis of a reduced sample of 1017 lawsuits – where dollar resolution amounts are available – shows that the magnitude of auditor dollar resolution amounts decreased in the lawsuits filed after 2002. Thus, auditor liability risk decreased after 2002.