소송이 제기될 경우 감사인은 손해배상에 따른 손실을 부담해야 할 뿐만 아니라 소송이 제기되었다는 그 자체만으로도 명성에 상당한 손상을 초래할 수 있다. 따라서 감사인은 소송으로 인한 잠재적 손실을 최소화하기 위한 여러 가지 방안들을 고려하게 된다. 선행연구들에 따를 경우 감사인은 고객포트폴리오의 관리를 통해, 보수적인 감사를 통해 그리고 감사보수 인상을 통해 소송으로 인한 잠재적 손실을 최소화하고자 노력한다. 또한 감사인은 소송위험이 높은 경우 감사투입노력을 증대시킴으로써 소송위험을 통제하기도 한다. 본 연구는 국내 회계감사 시장을 대상으로 소송위험이 높은 피감사기업에 대하여 감사인이 감사보수를 인상하는지 그리고 감사투입시간을 증대시키는지를 분석하였다. 또한 대형 감사인일수록 손해배상능력이 더 크기 때문에 소규모 감사인에 비하여 더 큰 소송위험에 직면한다는 선행연구 결과에 기초하여 대형 감사인이 소송위험에 더 민감하게 반응하는지를 분석하였다. 소송위험의 대용치로는 피감사기업의 재무제표 왜곡가능성을 사용하였다. 실증분석 결과, 감사인은 피감사기업의 재무제표 왜곡가능성이 높을수록 감사투입시간을 늘리고 감사 보수를 인상하는 것으로 나타났다. 그러나 대형 감사인이 소규모 감사인에 비하여 소송위험에 더 민감하게 반응한다는 사실은 확인하지 못하였다.

Litigation against auditors has increased dramatically in recent years. Besides potential liability payments, the litigation can damage auditor`s reputation. Therefore, auditors are trying to search for ways to minimize the potential losses from litigation. Some prior studies have shown that auditors can offset litigation risk in many ways, including improved audit quality, increases in audit fees and increases in the issuance of modified opinion. Auditors can also manage litigation risk by becoming more cautious in their choice of new clients and by withdrawing from high-risk engagement. Generally, litigation against auditors arises from situations where investors rely on financial statements and subsequently incur losses as a result of alleged audit failure. In other words, the litigation arises on the assumption that financial statement was manipulated by management and audit failure existed. If the two conditions were not satisfied, auditors don`t indemnify investors for damages even though investors bring a lawsuit against auditors. Therefore, auditors are most interested in the possibility of material omission or misstatements in the financial statement and the major function of an audit is to detect any material error in the financial statement and report the error. Choi and Choi(2003) developed a model to select which firms should be reviewed by the Financial Supervisory Service(FSS). The explanatory variables included in their model are as follows；(1) dummy variable for net income in terms of sales, (2) cash flow from operation to current liabilities, (3) financial expense to total sales, (4) loans-related parties to total assets, (5) a portion of minority shareholders. These are variables which instigate a firm to distort financial statement. Therefore, the probability(Pr_FSCORE) produced by the model represents the magnitude of a firm`s motives for accounting fraud. The stronger the motives for accounting fraud, the likelihood of material error in the financial statement being detected is higher, and other things being equal, it also leads to higher litigation risk. In this study, we regard the probability produced by Choi and Choi`s model as litigation proxy and test the hypotheses that litigation risk motivates auditor to charge higher fees and to spend more time in their audit. According to prior researches, large auditors(e.g., Big 4 auditors) face higher litigation risk because they are perceived as having "deep pockets." Therefore, large auditors are expected to be more sensitive to litigation risk even though they are exposed at the same level of litigation risk as small auditors. Based upon the prior studies, we also analyze the relationship between auditor size and sensitivity to litigation risk. Our initial sample consisted of all manufacturing firms listed on the Korean Stock Exchange from 1999 to 2006. We excluded firm-years with missing data about audit hours and audit fees, resulting in the final sample of 1,997 firm-year observations. We collected data about audit hours and audit fees from annual reports manually. Our tests are based on cross-sectional regression of natural log of audit fees(audit hours) on a number of variables, including litigation risk. We include various control variables to minimize the possibility that the experimental variable proxy for some other effect. We also incorporate the interaction variable between BIG 4 and litigation risk as a experimental variable to test whether large auditors are more sensitive to litigation risk. Our results show that the auditors charge higher fees and spend more time in their audit for the firms with a higher litigation risk. However, we were not able to find out that large auditors are more sensitive to litigation risk than small auditors.