A Catch-22 in Audit Litigation? Interventions that Decrease Assessed Auditor Culpability by Reducing Assessed Fraud Detectability and Auditor Acquiescence Generate Reactance Effects that Increase Assessed Damages

63 Pages Posted: 21 Aug 2014 Last revised: 29 Feb 2020

See all articles by Tim Brown

Tim Brown

University of South Carolina - Department of Accounting

Tracie M. Majors

University of Southern California

Mark E. Peecher

University of Illinois at Urbana-Champaign; University of Illinois College of Law

Date Written: February 27, 2020

Abstract

Juror assessments of audit firm culpability when material misstatements emerge after issuance of clean audit opinions are critical, but evidence shows these assessments can be dysfunctional and are often unfairly harsh on audit firms. Thus, despite helpful gains in the literature, there is need for advancing our understanding of interventions that can reduce jurors’ culpability assessments, and the key mediators through which these interventions operate. Drawing from recent psychology research on determinants of lay persons’ blameworthiness judgments, we propose two key mediators that we predict drive the extent to which jurors find defendant audit firms culpable: fraud detectability and auditor acquiescence. We examine whether three highly topical regulatory interventions—an auditor judgment rule (AJR) that directs jurors to not second-guess auditor judgments so long as made in good faith and with a reasonable basis, a critical audit matter (CAM) in the audit report that pertains to the disputed area, and a juror negligence training (JNT) in advance of the case evaluation—reduce jurors’ assessments of audit firm culpability through weakening jurors’ beliefs related to detectability and acquiescence. In two experiments with lay juror participants, we find that, as predicted, each of these factors reduces jurors’ culpability assessments through reducing detectability; the AJR and JNT also generally reduce acquiescence as well, although their joint effect is less than the sum of their individual effects. Importantly, we also identify a predicted “catch-22” in that the AJR and JNT (unlike the CAM) cause reactance effects in the subset of jurors who, despite the AJR or JNT, still find against the audit firm and when doing so, assign greater damages.

Keywords: Auditor Judgment Rule, Juror Negligence Training, Critical Audit Matters, Auditor Legal Liability, Reactance, Damages Assessments, Fraud Detectability, Auditor Acquiescence

JEL Classification: M40, M41, K20, K22, K41

Suggested Citation

Brown, Tim and Majors, Tracie McDonald and Peecher, Mark E., A Catch-22 in Audit Litigation? Interventions that Decrease Assessed Auditor Culpability by Reducing Assessed Fraud Detectability and Auditor Acquiescence Generate Reactance Effects that Increase Assessed Damages (February 27, 2020). Available at SSRN: https://ssrn.com/abstract=2483221 or http://dx.doi.org/10.2139/ssrn.2483221

Tim Brown

University of South Carolina - Department of Accounting ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

Tracie McDonald Majors

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Mark E. Peecher (Contact Author)

University of Illinois at Urbana-Champaign ( email )

Gies College of Business
1206 South Sixth Street
Champaign, IL 61820
United States
217-333-4542 (Phone)
217-244-0902 (Fax)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

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