The Impact of Proposed Changes to the Content of the Audit Report on Jurors' Assessments of Auditor Negligence

• In Event: Behavioral Implications of the Auditor's Report

Abstract

This study experimentally examines whether and how two potential changes to the audit report, clarification of the meaning of reasonable assurance and inclusion of a mandatory paragraph that identifies and describes a critical audit matter (CAM), affect jurors’ assessments of auditor liability. Overall, we find that clarifying the term reasonable assurance within the audit report reduces auditors’ litigation exposure. We also find that simply identifying a critical audit matter in the audit report does not significantly affect auditors’ negligence likelihood compared to the standard audit report, but jurors are more likely to find auditors negligent when the CAM paragraph includes a description of the specific audit procedures performed to address the identified critical audit matter. However, clarifying the meaning of reasonable assurance in the audit report with this expanded critical audit matter paragraph significantly reduces the likelihood that auditors are found negligent, mitigating the negative unintended consequences of this expanded disclosure. These results inform practitioners, standard setters, and academics on how the proposed changes to the audit report affect juror’s decision making and auditors’ ability to defend their work.

Authors

• Brian Matthew Goodson, University of Mississippi

• Ann Backof, University of Virginia

• Kendall O Bowlin, University of Mississippi