Does Using Specialists Provide Auditors with Safe Harbor Protection for Aggressive Management Estimates?

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 20: Auditor Interactions and Use of Specialists

Abstract

Auditors often rely on specialists to establish reasonable ranges for fair value and other management estimates. While the main purported benefit of using specialists is increased audit effectiveness, prior research has found that using specialists provides litigation protection. We predict and provide supporting experimental evidence that the extent of such litigation protection depends on the aggressiveness of the estimate and the type of specialist used. Specifically, jurors view auditors’ acceptance of relatively aggressive management estimates as more justifiable, and thus are less likely to find the auditors negligent, when the auditors used a specialist to develop a reasonable range for the estimate. This effect, however, does not occur when auditors accept more conservative estimates. Further, the observed effects are stronger when auditors use external versus internal specialists. Overall, this study indicates that utilizing specialists, particularly external specialists, may provide safe harbor protection for auditors who accept relatively aggressive management estimates.

Authors

• Owen Brown, Baylor University

• Jonathan H Grenier, Miami University

• Jonathan Pyzoha, Miami University

• Andrew Reffett, Miami University