Independence Threats, Litigation Risk, and the Auditor's Decision Process

42 Pages Posted: 13 Aug 2005

Abstract

This study examines the effect of independence threats and litigation risk on auditors' evaluation of information and subsequent reporting choices. Using a Web-based experiment, I tracked auditors' information gathering and evaluation leading to a going-concern reporting decision. Specifically, forty-eight audit managers assessed client survival likelihood, gathered additional information, and suggested audit report choices. I found that auditors facing high independence threats (fear of losing the client) evaluated information as more indicative of a surviving client and were more likely to suggest an unmodified audit report, consistent with client preferences. In contrast, auditors facing high litigation risk evaluated information as more indicative of a failing client and were more likely to suggest a modified audit report. In addition, the association between risk and report choice was fully mediated by final information evaluation. This suggests that it is unlikely that different reporting choices resulted from a conscious choice bias but rather that motivated reasoning during evidence evaluation plays a key role in the effect of risk in auditor decision-making.

Keywords: Auditor Independence, Motivated Reasoning, Going Concern, Auditor Reporting, Decision Process

JEL Classification: D80, M49, C92

Suggested Citation

Blay, Allen Dennis, Independence Threats, Litigation Risk, and the Auditor's Decision Process. Contemporary Accounting Research, Vol. 22, No. 4, Winter 2005. Available at SSRN: https://ssrn.com/abstract=774407

Allen Dennis Blay (Contact Author)

Florida State University ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States
850-727-0953 (Phone)

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