Attempts to Leverage Engagement Partner Identities in Audit Litigation and the Effectiveness of a Show-and-Tell Defense

• In Event: Auditing Standards and Rules

Abstract

The PCAOB recently adopted Rule 3211 which requires all audit firms to file a Form AP with the Board. The intended purpose of Form AP was to require the disclosure of the name of the engagement partner on audits of public companies as a means of enhancing audit quality and transparency for financial statement users. However, there is concern regarding the possible unintended consequences of this increased transparency to stakeholders. This study addresses practitioner concerns of increased liability by considering how information about engagement partners can be leveraged by the prosecution to support allegations of negligence. Plaintiffs can leverage information from a database (AuditorSearch) on the PCAOB’s website to draw conclusions on an individual partner’s portfolio of engagements and about the partner’s expertise. We conducted an experiment with 231 jury-eligible MTurk participants to examine the effect of information about a partner’s workload and industry expertise on juror verdicts of audit firm negligence. Consistent with expectations, when the plaintiff’s strategy included identifying the engagement partner as having been overworked or lacking industry expertise, jurors were more likely to provide significantly higher negligence verdicts than without such knowledge. These results are mediated by activating assessments of partner negligence and negative emotional reactions to the audit firm. We also find that the defense strategy of using visuals (show and tell) as evidence of due professional care is an effective remedial technique against plaintiff’s strategies of exploiting data from Form AP. Conclusions and implications of our study are also noted.

Authors

• Erin Burrell Nickell, Stetson University

• Lisa M Victoravich, University of Denver

• D. Jordan Lowe, Arizona State University - Tempe