The Moderating Role of General Counsel on the Relationship between Clients’ Litigation Risk and Audit Efforts

This study empirically examines the moderating effect of General Counsel (GC) presence on the relationship between clients’ litigation risk and audit efforts. Using hand-collected data from the annual reports of listed firms in Korea, we find a positive association between litigation risk and audit fees as well as hours (proxies for audit effort), meaning that high clients’ litigation risk induces more audit efforts. Furthermore, the presence of a GC alleviates the relationship between litigation risk and audit efforts, suggesting that heightened clients’ litigation risk prompts auditors to perceive the firm’s inherent risk as high. However, when a firm employs a GC, auditors indicate a lower control risk for the firm. This finding indicates that a GC acts as an effective internal control system to manage litigation risk. To mitigate endogeneity concerns, we conduct propensity score matching (PSM) analysis, difference-in-differences (DID) method, and instrumental variables approach and find consistent results. Despite the mandatory appointment of GCs, non-compliance penalties are not enforced, leading to a predominantly self-regulated duty. Therefore, this study offers policy implications by demonstrating the effectiveness of risk management for firms that voluntarily appoint a GC.