Accounting Flexibility, Auditor Liability, and the Psychology of Blame

• In Event: Auditor Liability

Abstract

We examine psychology of blame and propose that auditors face three distinct types of escalating blame—reactionary blame, social blame, and legal blame—when investors experience harmful events such as audit failures or financial losses. We examine how the perceived flexibility of accounting guidance affects each of these types of blame and their interrelationships. Because of the perceived flexibility associated with principles-based accounting, we predict a positive moderating relationship between accounting flexibility and social blame explained by investors’ assessments of reactionary blame. We also predict a double-mediation path between manipulated accounting flexibility and legal blame mediated by both reactionary blame and social blame. The results are consistent with these hypotheses. We also find that the assessment of the auditor’s professional characteristics affect investor assessment of legal blame more under principles-based accounting rather rules-based accounting. Our results help explain how auditors’ perceived control over financial reporting decisions affects professional liability.

Authors

• Robert M Cornell, Oklahoma State University

• Rick C Warne, George Mason University