An Auditor Judgment Rule and Juror Learning: Theory-Based Interventions to Reduce Outcome Effects in Juror Evaluations of Auditor Negligence

50 Pages Posted: 21 Aug 2014 Last revised: 19 Dec 2018

See all articles by Tim Brown

Tim Brown

University of Illinois at Urbana-Champaign - Department of Accountancy

Tracie M. Majors

University of Southern California

Mark E. Peecher

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

Date Written: November 2018

Abstract

Professional judgment is a centerpiece of auditing that affords auditors considerable latitude in assessing the risk of material misstatement, designing audit procedures, and interpreting evidence. In cases of undetected material fraud, however, this latitude can amplify outcome effects in jurors’ negligence verdicts by making it easier for plaintiffs to identify alternative professional judgments that the defendant auditors could have used to detect the fraud. This latitude makes it vital to understand moderators of how jurors react to the presence of alternative reasonable professional judgments. We propose two interventions rooted in behavioral legal theory. The first is negligence training, which we predict to reduce outcome effects in jurors because a negligence standard allows a not guilty verdict despite the presence of reasonable alternative judgments. The second is an auditor judgment rule, which is fashioned after the business judgment rule, as discussed in recent prior audit studies. Under this rule, jurors should defer to any reasonable judgment made by an auditor in the absence of bad faith. Hence, under a judgment rule, the presence of alternative reasonable judgments does not, by itself, signal negligence. Since both of these interventions operate by altering the dispositive value that evaluators draw from the presence of alternative reasonable judgments, we predict the two interventions together will not incrementally ameliorate outcome effects, i.e., they are substitutes. We test our theory in three experiments. In experiment one, we employ relatively less elaborative case materials, and find that lay jurors render fewer negligent verdicts when trained, but there is little incremental effect of providing a judgment rule when jurors are trained. We also find that, for untrained jurors, a judgment rule decreases negligence verdicts. In experiment two, we find that a judgment rule again has no discernible effect on trained jurors, this time with naturally trained jurors, i.e., law students who have completed a course on tort law. Finally, in experiment three, we replicate our finding that an auditor judgment rule reduces negligent verdicts for untrained lay jurors, despite employing considerably more elaborative and realistic case materials (that reinforce the commonalities between ordinary negligence and an auditor judgment rule). Our theory and results collectively have implications relevant to audit firms and their attorneys, as well as to audit and legal policymakers and regulators.

Keywords: Auditor Judgment Rule; Juror Evaluations; Auditor Negligence; Outcome Effects; Juror Learning; Legal Reforms

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

Suggested Citation

Brown, Tim and Majors, Tracie McDonald and Peecher, Mark E., An Auditor Judgment Rule and Juror Learning: Theory-Based Interventions to Reduce Outcome Effects in Juror Evaluations of Auditor Negligence (November 2018). Available at SSRN: https://ssrn.com/abstract=2483221 or http://dx.doi.org/10.2139/ssrn.2483221

Tim Brown

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
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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