The Effects of Audit Quality and Consequence Severity on Juror Evaluations of Auditor Responsibility for Plaintiff Losses

Abstract

This study investigates whether providing higher quality audits increases auditors' chances of avoiding legal liability. Negligence rules hold auditors responsible for plaintiff losses only when the quality of the audit provided fails to meet standards of care. The results of my experiment suggest that the ex post observed consequences of audit failure can affect the standards of care to which jurors hold auditors. Specifically, participants serving in the role of jurors assessed higher standards of care for auditors when the consequences of audit failure were more severe. Furthermore, when the consequences of audit failure were more severe, participants' evaluations of the auditor did not depend on the quality of the audit provided—auditors who provided higher quality audits were evaluated just as negatively as those who provided lower quality audits. In contrast, when audit failure led to only moderately negative consequences, auditors who provided higher quality audits received more favorable evaluations. These results suggest that providing higher quality audits will not necessarily protect auditors from legal liability when the consequences of audit failure are severe.

Audit Sampling Methods And Juror Negligence Awards: An Expectation Gap?

“…Junior-level students were judged to be suitable participants because they are of legal age to serve on a jury. This is consistent with other jury research (e.g., Kadous 2000Kadous , 2001.…”

No Good Deed Goes Unpunished? Recent Evidence on the Effects of Identifying and Investigating Fraud Risks on Auditors' Litigation Exposure

“…Imagining such adjustments to the auditors' procedures, however, is more difficult when the auditors did not investigate for the fraud. This is important because evaluator awareness of specific actions that, if implemented, would have allowed the auditors to detect the fraud increases evaluators' belief that the fraud should have been detected (McMullen et al 1995;Roese 1997), which increases the severity of their assessments of auditor liability (Kadous 2000;Reffett 2010). …”

The Effects Of Hindsight Bias On Auditors Confidence In Going-Concern Judgments And On The Audit Opinion Decision

“…Financial statement users asked to assess a company's viability have been found to be prone to hindsight bias (Buchman, 1985). Jurors (Lowe & Reckers, 1994;Kadous, 2000;Kadous, 2001) and judges (Anderson et al, 1995;Anderson et al, 1997) asked to evaluate the actions of auditors have also been found to be prone to the bias. Brown and Solomon (1987) found that capital-budgeting decisions are influenced by outcome information.…”