Are Juries More Likely to Second-Guess Auditor Judgment under Imprecise Accounting Standards?

36 Pages Posted: 10 Sep 2012

See all articles by Kathryn Kadous

Kathryn Kadous

Emory University - Goizueta Business School

Molly Mercer

DePaul University

Date Written: September 10, 2012

Abstract

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

Kadous, Kathryn and Mercer, Molly, Are Juries More Likely to Second-Guess Auditor Judgment under Imprecise Accounting Standards? (September 10, 2012). Available at SSRN: https://ssrn.com/abstract=2144465 or http://dx.doi.org/10.2139/ssrn.2144465

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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