Jury Verdicts Against Auditors Under Precise and Imprecise Accounting Standards

42 Pages Posted: 27 Sep 2010 Last revised: 10 Jun 2012

See all articles by Kathryn Kadous

Kathryn Kadous

Emory University - Goizueta Business School

Molly Mercer

DePaul University

Date Written: April 12, 2011

Abstract

U.S. auditors are concerned that the greater imprecision in accounting standards under IFRS will lead to increased legal liability. We conduct an experiment with 749 mock jurors to examine how juries evaluate auditor conduct under precise and imprecise standards. We find that juries return more verdicts against auditors under imprecise standards than under precise standards – but only when the audit client’s accounting is less aggressive and deviates from industry norms. These negative consequences are eliminated when the less aggressive accounting is instead consistent with industry norms, suggesting that auditors should be able to anticipate and avoid increased legal exposure under imprecise standards. We also find that when the audit client’s accounting is more aggressive, jurors return fewer verdicts against auditors under imprecise standards than precise standards. Taken together, our results suggest that imprecise standards are a double-edged sword that increases verdicts against auditors in some circumstances and decreases verdicts against auditors in other circumstances.

Keywords: audit litigation, principles v. rules, jury decision making, IFRS

JEL Classification: K13, M41

Suggested Citation

Kadous, Kathryn and Mercer, Molly, Jury Verdicts Against Auditors Under Precise and Imprecise Accounting Standards (April 12, 2011). Emory Public Law Research Paper No. 10-132, Emory Law and Economics Research Paper No. 10-85, Available at SSRN: https://ssrn.com/abstract=1683766 or http://dx.doi.org/10.2139/ssrn.1683766

Kathryn Kadous (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-4967 (Phone)

Molly Mercer

DePaul University ( email )

1 E Jackson Blvd Suite 6000
Chicago, IL 60604
United States
(312)362-8956 (Phone)

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