A Catch-22 in Audit Litigation? Interventions that Decrease Assessed Auditor Culpability by Reducing Assessed Fraud Detectability and Auditor Acquiescence Generate Reactance Effects that Increase Assessed Damages

Brown, Tim; Majors, Tracie M.; Peecher, Mark E.

doi:10.2139/ssrn.2483221

Cited by 32 publications

(38 citation statements)

References 47 publications

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“…There is some early evidence regarding the effect of a KAM section within the three following domains: Auditor liability (Backof, Bowlin, and Goodson 2014;Brasel, Doxey, Grenier, and Reffett 2016;Brown, Majors, and Peecher 2015;Gimbar, Hansen, and Ozlanski 2016a;Kachelmeier, Schmidt, and Valentine 2015), aggregated capital market reactions (Lennox, Schmidt, and Thompson 2016), and individual investors' decisions or assessments (Christensen, Glover, and Wolfe 2014;1 Köhler, Ratzinger-Sakel, and Theis 2016). The preliminary behavioral evidence concerning the studies on auditor liability suggest that KAM sections regarding subsequent litigation either reduce or do not influence auditor liability.…”

Section: Introductionmentioning

confidence: 99%

Does Considering Key Audit Matters Affect Auditor Judgment Performance?

Ratzinger‐Sakel

Theis

2017

SSRN Journal

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We investigate the impact of considering key audit matters (KAM) on auditor judgment performance and conducted a 2×2 between-subjects experiment based on a goodwill impairment testing case with 73 experienced auditors. We manipulated the two independent variables KAM consideration (present vs. absent) and client pressure (high vs. low). As dependent variables, we captured skeptical judgment and action as different facets of auditor judgment performance. Our results suggest that auditors' reaction to our client pressure manipulation is rather weak. If at all, auditors seem to become slightly more skeptical in their judgments and actions when client pressure is high, which might suggest that a reasonableness constraint has been triggered. Furthermore, we find that auditors exhibit significantly less skeptical judgment when KAM consideration is present than when KAM consideration is absent. This suggests that, when considering KAM, auditors are more willing to acquiesce to their clients' desired accounting treatments due to moral licensing. JEL Classification: M42

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Section: Introductionmentioning

confidence: 99%

Does Considering Key Audit Matters Affect Auditor Judgment Performance?

Ratzinger‐Sakel

Theis

2017

SSRN Journal

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“…Although these results, coupled with results in contemporaneous studies (Brown, Majors, and Peecher 2015;Kachelmeier, Schmidt, and Valentine 2015) should provide standard setters with a degree of comfort that disclosing CAMs will not increase auditor liability, there undoubtedly are exceptions that future research should examine to further inform policymakers. For example, two contemporary studies report that, in certain situations, disclosing CAMs can increase jurors' judgments of auditor liability such as when misstatements pertain to violations of rules-based/bright line standards (Gimbar, Hansen, and Ozlanski 2016) and/or when the concept of reasonable assurance is not explained to jurors (Backof, Bowlin, and Goodson 2015).…”

Section: Discussionmentioning

confidence: 93%

Risk Disclosure Preceding Negative Outcomes: The Effects of Reporting Critical Audit Matters on Judgments of Auditor Liability

Brasel

Doxey

Grenier

et al. 2016

Current Issues in Auditing

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SUMMARY:The PCAOB and the IAASB recently proposed several significant changes to the audit reporting model, including requiring auditors to disclose critical audit matters (CAMs) in their audit reports. While investors appear to support such additional disclosures, some audit practitioners, academics, and attorneys contend that requiring auditors to disclose CAMs will make it easier for plaintiffs' attorneys to successfully sue auditors when audits fail to detect material misstatements. A recent study, ''Risk Disclosure Preceding Negative Outcomes: The Effects of Reporting Critical Audit Matters on Judgments of Auditor Liability'' (Brasel, Doxey, Grenier, and Reffett 2016), reports results of an experiment that inform this issue. Contrary to the above concerns, results of the study indicate that disclosing CAMs, either related or unrelated to an undetected material misstatement, likely will not increase, and could decrease (depending on the type of misstatement), the probability of jurors holding auditors liable when audits fail to detect material misstatements. Further, results indicate that explicitly stating in the audit report that there were no CAMs, an option allowed within the PCAOB's proposal, would increase negligence verdicts against audit firms. The following article summarizes the We acknowledge the anonymous reviewers and editor for their helpful comments throughout the review process.Editor's note: Accepted by J. Gregory Jenkins. Submitted: February 2016Accepted: July 2016 Published Online: July 2016 1 study's motivation, method, results, and implications for both audit reporting and risk disclosure in general.

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“…Gimbar, Hasen, and Ozlanski (2016) argue that these changes have a significant impact in terms of increasing the auditor's responsibility and should lead auditors to increase the value of their auditing work, since they will have to expand the auditing procedures for risk minimization. Brown et al (2014) state that the auditor's responsibility is reduced when a disclosed KAM is related to a topic in which fraud had been found at some previous moment.…”

Section: New Audit Report and Independent Auditmentioning

confidence: 99%

“…This paper stands out from the studies already carried out on the subject, since it analyzes the market's behavior on receiving particular information. Most of the studies have focused on KAMs and their impacts on the auditor's responsibility, while those that have analyzed their informational relevance have been based on questionnaires mostly applied to a non-investor public (Brown, Majors & Peecher, 2014;Brasel, Doxey, Grenier & Reffett, 2016;Christensen, Glover & Wolfe, 2014). In a recent study, Sirois, Bédard, and Bera (2018) investigated how the adoption of KAMs affects the attention of financial statement users, using an eye-tracking system in an experiment with post-graduate accounting students.…”

Section: Introductionmentioning

confidence: 99%

The informational relevance of key audit matters

Júnior¹,

Galdi

2020

Rev. contab. finanç.

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This paper aims to investigate whether the key audit matters (KAMs) contained in the annual standardized financial statements (SFSs) of Brazilian listed companies have contributed with informational relevance for investors. The study fills a gap in the literature by evaluating the Brazilian market’s reaction to the disclosure of the information contained in the KAMs, which became mandatory for listed companies to disclose in their financial statements as of the 2016 fiscal year. The topic under analysis is of practical relevance as the use of KAMs in the independent auditor’s report is growing and expanding to other publicly-held companies in addition to listed ones. This study provides a contribution to the Brazilian capital market regulator (Comissão de Valores Mobiliários - CVM) and the Institute of Independent Auditors of Brazil (Ibracon) regarding understanding the impacts of the new auditor’s report, thus enabling the improvement and expansion of this mechanism. For the analysis, we use the event study methodology, which consists of evaluating how information influences the market in a particular period associated with the occurrence of a disclosure event. To do so, we used the variation in the sum of the daily abnormal returns of each company on the days that form part of the information disclosure window. The results of this paper indicate the consistency of the informative content of the financial statements with KAMs, insofar as the variation in the cumulative abnormal return of the companies analyzed is positively associated with the cumulative returns in the information disclosure window for the SFSs following the adoption of the new independent auditor’s report. Thus, this paper contributes to the literature by presenting empirical evidence of the informational relevance of the content of the new audit report containing KAMs.

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A Catch-22 in Audit Litigation? Interventions that Decrease Assessed Auditor Culpability by Reducing Assessed Fraud Detectability and Auditor Acquiescence Generate Reactance Effects that Increase Assessed Damages

Cited by 32 publications

References 47 publications

Does Considering Key Audit Matters Affect Auditor Judgment Performance?

Does Considering Key Audit Matters Affect Auditor Judgment Performance?

Risk Disclosure Preceding Negative Outcomes: The Effects of Reporting Critical Audit Matters on Judgments of Auditor Liability

The informational relevance of key audit matters

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