The Impact of Audit Evidence Documentation on Jurors’ Negligence Verdicts and Damage Awards

• In Event: Auditor Liability

Abstract

Audit workpapers play a key role in auditor negligence trials, yet little is known about how the documentation choices made in these workpapers affect jurors’ decision making. I experimentally investigate how auditors’ documentation of their consideration of the alternative accounting treatments and their use of a risk-based audit approach influences jurors’ auditor negligence verdicts and damage awards. I find that auditors’ decision to document their consideration of the accounting alternatives acts as a double-edged sword. Such documentation increases the likelihood that auditors are found negligent because it increases jurors’ perceptions of the foreseeability of the misstatement, a key determinant of auditors’ personal control. However, when this same documentation is combined with documentation of the risk-based audit approach that explicitly links the audit risks to the work performed to address each risk, jurors award the lowest damage awards because they perceive auditors’ actions prior to the negligent act as most compliant with the auditing standards. These findings inform academics, regulators, and auditors on the importance of audit documentation decisions on jurors’ decision making.

Author

• Ann Backof, University of Virginia