The Irrational Auditor and Irrational Liability
50 Pages Posted: 15 Feb 2006 Last revised: 23 Jul 2013
Abstract
This essay argues that less liability for auditors in certain areas might encourage more accurate and useful financial statements, or at least equally accurate statements at a lower cost. Audit quality is promoted by three incentives: reputation, regulation, and litigation. When we take reputation and regulation into account, exposing auditors to potentially massive liability may undermine the effectiveness of reputation and regulation, thereby diminishing integrity of audited financial statements. The relation of litigation to the other incentives that promote audit quality has become more important in light of the sea change that occurred in the regulation of the auditing profession with the adoption of the Sarbanes-Oxley Act. Given these fundamental changes in the regulatory backdrop, I argue that the marginal benefit of litigation has been substantially diminished and in many cases that it is likely to be ineffective in promoting greater audit quality. I propose a knowledge standard for auditor liability in securities fraud cases.
JEL Classification: K22, M41
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Who Cares About Auditor Reputation?
By Jan Barton
-
Market and Political/Regulatory Perspectives on the Recent Accounting Scandals
By Ray Ball
-
Market and Political/Regulatory Perspectives on the Recent Accounting Scandals
By Ray Ball
-
The Credibility of Self-Regulation: Evidence from the Accounting Profession's Peer Review Program
By Clive S. Lennox and Gilles Hilary
-
Competition for Andersen's Clients
By Mark J. Kohlbeck, Brian W. Mayhew, ...
-
By Karen K. Nelson, Richard A. Price, ...