Audit Risk & Decision Aids: The Moderating Effect of Legal Defensibility on Decision Aid Reliance

Abstract:     
The purposes of the current study are to examine whether audit risk triggers prospective rationality cognition related to how decision aid reliance could be used as a defensive strategy in a court of law should legal action arise in the future, and assess the degree to which defensibility moderates the relationship between audit risk and decision aid reliance. This is a particularly relevant question in the Sarbanes-Oxley era, as decision aids hold the potential to improve audit quality; yet, immense legal and regulatory pressures on audit firms to improve audit quality could lead to a 'check list' mentality where auditors subordinate their audit judgments for the sake of compliance. Based on an experiment involving 118 audit practitioners, we find that auditors rely more on decision aid recommendations when either litigation risk (exogenous to the audit risk model) or internal control risk (endogenous to the audit risk model) is high relative to low. When litigation risk and internal control risk are simultaneously high, there is an interactive effect on decision aid reliance. Further analysis of the interaction suggests that the litigation risk amplifies cognition of defensibility related to internal control risk, which in turn moderates decision aid reliance. The experimental design purposefully incorporates a fairly unreasonable decision aid recommendation and, disturbingly, when both risks are high, the auditors appear to deferentially follow the aid's advice. Surprisingly, as decision aid reliance increases, decision confidence decreases. Post-experimental analyses reveal that fairly low reliance on decision aids in practice is mainly due to uncertainty surrounding the accuracy of decision aids and lack of refresher training on decision aid use.

Keywords: decision aid reliance, litigation risk, internal control risk, audit risk

JEL Classification: M40, M41, M49, G38, C92

working papers series