When Does Reliance on Technology Elevate Auditor Liability?

• In Event: Technology-Related Litigation Judgments

Abstract

Audit firms continue to make large investments in advanced audit technologies. While the intent of these investments is to enhance audit effectiveness and efficiency, concerns have been expressed about the potential for elevated auditor liability due to well-documented psychological aversions to use of technology in judgment and decision-making. Melding theories on attribution and counterfactual thinking, we predict that reliance on technology will only result in elevated liability when the audit task is relatively subjective, thereby requiring professional judgment, and this effect will be larger when the undetected misstatement is due to management fraud (vs. error). For objective tasks, requiring little to no judgment, we predict no effect on auditor liability. Results from two experiments with jury-eligible individuals support these predictions as we only observe elevated liability for subjective audit tasks involving management fraud. In other words, jurors are generally receptive to reliance on technology, but do not view technology as an adequate replacement when auditors need to simultaneously exercise professional judgment and detect cues of management deception. Although more research is necessary, including the efficacy of various defense tactics, our study should give practitioners a degree of comfort that technology reliance will only elevate auditor liability under specific conditions.

Authors

• Ann Backof, University of Virginia

• Jonathan H Grenier, Miami University

• Jason T Rasso, University of South Carolina