The Effects of Critical Audit Matter Paragraphs and Accounting Standard Precision on Auditor Liability

• In Event: Continental Breakfast - Research and Education Forum
  In Roundtable Session: Table 13: Auditor Liability 2

Abstract

The PCAOB recently proposed amendments to the standard audit report, including the addition of mandatory paragraphs that highlight critical audit matters (CAMs), and the SEC continues to evaluate the use of principles-based accounting standards within existing US GAAP. We investigate the effects of three levels of CAM disclosure on auditor liability judgments in both rules-and principles-based environments. Applying the culpable control model (Alicke 2000), we posit that higher assessments of auditor blame will result from increased disclosure within the audit report under rules-based accounting standards. Using an experiment, we manipulate accounting standard type (rules-based, principles-based) and level of CAM disclosure (none, CAM related to litigation, CAM unrelated to litigation). In the absence of a CAM we find a higher level of auditor liability under principles-based standards than under rules-based standards. In addition, we find that the introduction of either a related or an unrelated CAM is associated with higher liability in a rules-based setting, but not in a principles-based setting. Our findings provide important evidence about why CAM disclosures increase auditor liability and give insight into the consequences the proposed regulatory changes would have on auditor efficiency and effectiveness.

Authors

• Christine Gimbar, Virginia Polytechnic Institute and State University

• Thomas Bowe Hansen, Virginia Polytechnic Institute and State University

• Michael Edward Ozlanski, University of New Hampshire