The Effects of Critical Audit Matter Removal and Duration on Jurors’ Assessments of Auditor Negligence
Posted: 30 Jan 2018 Last revised: 16 Nov 2018
Date Written: 2018
A primary concern facing the PCAOB's requirement of disclosing critical audit matters (CAMs) is increased auditor litigation risk. Evidence with Key Audit Matters from the U.K. indicates auditors may subsequently remove a CAM or continue to report the same CAM for several years. Therefore, we investigate the effects of CAM removal and duration on jurors' assessments of auditor negligence when there is a subsequent material misstatement due to fraud in the account related to the CAM. Using the Culpable Control Model, we predict jurors will assess higher auditor negligence when a CAM is removed than when a CAM is reported and when a CAM is reported for multiple years than for one year. Results of our first experiment, in which the CAM relates to a more complex account, highlight a quandary auditors could face in the years subsequent to reporting a CAM such that removal of a CAM that had been reported for multiple years increases auditor liability. Results of our second experiment, in which the CAM relates to a less complex account, provides limited support that CAM removal increases liability. Our results should be of interest to academics, practitioners, and regulators regarding legal implications of the new CAM standard.
Keywords: Auditor Liability, Critical Audit Matters, Culpable Control Model, Jurors
JEL Classification: M40, M42, K20, K22
Suggested Citation: Suggested Citation