The Effects of Accounting Standard Precision, Auditor Task Expertise, and Judgment Frameworks on Audit Firm Litigation Exposure

34 Pages Posted: 27 Oct 2010 Last revised: 3 Nov 2013

Jonathan H. Grenier

Miami University - Department of Accountancy

Bradley Pomeroy

University of Waterloo

Matthew Stern

DePaul University; University of Illinois at Urbana-Champaign

Date Written: August 27, 2013

Abstract

Recent research suggests that adopting imprecise accounting standards elevates audit firm litigation exposure and could undermine auditor objectivity if audit firms respond by herding to industry norms. This paper reports the results of two experiments that demonstrate how audit firms can effectively mitigate the elevated litigation exposure without herding to industry norms by staffing engagements with recognized technical experts, using judgment frameworks and automated decision aids, and providing persuasive evidence of adherence to auditing standards. We find that judgment frameworks are particularly well-suited for defending judgments under imprecise standards, and represent a cost-effective alternative to using technical experts. However, our results also indicate that judgment frameworks may provide a safe harbor for relatively low quality judgments when those frameworks are used under precise standards. We discuss implications for audit firms, courts, and regulators that currently conduct or evaluate audits within and across jurisdictions where the precision of accounting standards varies considerably.

Keywords: accounting standard precision, audit firm litigation, auditor expertise, judgment framework

JEL Classification: M41, C93

Suggested Citation

Grenier, Jonathan H. and Pomeroy, Bradley and Stern, Matthew, The Effects of Accounting Standard Precision, Auditor Task Expertise, and Judgment Frameworks on Audit Firm Litigation Exposure (August 27, 2013). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1698493 or http://dx.doi.org/10.2139/ssrn.1698493

Jonathan H. Grenier

Miami University - Department of Accountancy ( email )

800 East High Street
Oxford, OH 45056
United States
513-529-2013 (Phone)

Bradley Pomeroy (Contact Author)

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada

Matthew Stern

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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