The double-edged sword of forensic accounting services: litigation risks in Jordan’s industrial sector

Abstract

Purpose

This study aims to examine the association between forensic accounting services (FAS) and the risk of litigation within the context of industrial firms that are publicly traded on the Amman Stock Exchange by using the resource-based theory.

Design/methodology/approach

This study uses a data set consisting of 250 firm-year observations from 2017 to 2021, obtained from the annual reports of 50 selected firms. Logistic regression techniques are used to examine the specifics of the investigated relationship.

Findings

The findings strongly suggest that companies that use FAS are more likely to face increased litigation risks. This observation suggests that these firms are subject to a more thorough level of evaluation or scrutiny, which inherently increases their vulnerability to potential risks. The study incorporated several control variables such as firm age, size, profitability and working capital. However, it is noteworthy that the connection between FAS and litigation risk emerged as particularly prominent.

Research limitations/implications

Findings highlight the need for practitioners to tread cautiously with FAS. Although they provide in-depth evaluations, they can also unveil vulnerabilities, leading to increased legal action. Companies should balance the depth of FAS scrutiny against potential legal repercussions, ensuring they harness its benefits without inadvertently raising legal risks.

Originality/value

While most studies have emphasized the impact of forensic accounting on fraud, this paper covers a gap in the literature regarding the impact of FAS on litigation risks. The paper also facilitates the understanding of the correlation between firm characteristics and the likelihood of litigation.

Citation

Al-Hazaima, H., Arabiat, O. and Maayah, G. (2023), "The double-edged sword of forensic accounting services: litigation risks in Jordan’s industrial sector", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-07-2023-0414