Are Juries More Likely to Second-Guess Auditor Judgment under Imprecise Accounting Standards?
36 Pages Posted: 10 Sep 2012
Date Written: September 10, 2012
Auditors are concerned that less precise accounting standards will result in more second-guessing of their judgments and thus greater legal liability. We report the results of an experiment that tests the validity of this concern. In the experiment, mock jurors deliberate to arrive at jury verdicts for a lawsuit alleging an audit firm is negligent for allowing a particular client reporting decision. We manipulate the client’s reporting decision (Aggressive, Conservative) and the precision of the accounting guidance related to the reporting decision (Precise, Imprecise). When the client’s reporting is conservative and complies with the precise standard, we observe more second-guessing of auditor judgments under the imprecise standard. However, when the auditor allows aggressive client reporting, we observe the opposite of second-guessing — over-leniency — under the imprecise standard. Juries are surprisingly hesitant to find the auditor negligent for allowing aggressive reporting and return fewer verdicts against the auditor under the imprecise standard than the precise standard. Our results suggest a role for tools to help jurors evaluate auditor reporting judgments under imprecise standards, both to avoid second-guessing of auditors’ conservative reporting choices and to hold auditors responsible for overly aggressive reporting choices.
Keywords: Audit Litigation, Standard Precision, Principles v. Rules, Second-Guessing, Jury Decision Making, IFRS
JEL Classification: M40, M41, M42, K41, K22
Suggested Citation: Suggested Citation