Do Jurors Perceive a Differential Audit Quality Based on the Auditor’s Decision Justification Method?

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 7: Effects of Auditor Oversight

Abstract

Accounting standards can be ambiguous enough that auditors are unable to determine a single correct accounting treatment. If auditors are required to defend a decision made under an ambiguous standard in a negligence lawsuit, their justification for that decision could be critical in the jurors’ ultimate evaluation of audit quality. In this experiment, participants take on the role of a juror in a lawsuit against an audit firm. The auditor is accused of allowing a client to use an improper lease classification method. Two factors are manipulated: the justification method used by the auditor (professional judgment, firm guidance, and industry norms) and the accounting framework under which the auditor’s client operates (rules-based and principles-based). I find that audit quality and decision credibility are higher when auditors justify their decision using industry norms. Additionally, jurors are less likely to reach a guilty verdict and will assess lower damages when the auditor uses industry norms. Surprisingly, jurors did not find differences in the correctness of the auditor decision or the degree of negligence exhibited by the auditor. This finding suggests that the use of industry norms may help to deflect the negative attributions that can occur due to outcome bias. I find no differences in audit quality under the different accounting frameworks, although further research is needed to determine whether this lack of finding is merely a function of certain research design choices in this particular experiment.

Author

• Erik S. Boyle, The University of Utah