The Impact of a Judgment Rule and Critical Audit Matters on Auditor Legal Liability - The Moderating Role of Legal Knowledge

• In Event: Auditor Liability

Abstract

We examine how evaluators with more (law students) versus less (lay jurors) legal knowledge react to two institutional factors – an auditor judgment rule and critical audit matters – in reaching verdicts and assessing damages. Studying evaluators with less legal knowledge enhances comparability with prior auditor liability research, while studying evaluators with more legal knowledge increases generalizability as auditor negligence cases much more frequently are settled out of court (e.g., via arbitration) than through jury verdicts. To develop our hypotheses, we meld a key principle from the expertise paradigm (e.g., Libby and Luft 1993) with the story model of juror decision-making (e.g., Pennington and Hastie 1992). This approach warrants predicting that factors for which the two evaluator types have dis(similar) relevant extant knowledge will likely have dis(similar) influence on the stories they construct in determining negligence assessments. In support of our theory, findings show that an auditor judgment rule has a greater effect in reducing negligent verdicts for evaluators with less legal knowledge, but also introduces the cost of greater damages assessed by these evaluators. Our results show that evaluators with less legal knowledge increase leniency with a judgment rule when rendering verdicts, but punish auditors whom they believe have failed to meet this perceived easier threshold. By contrast, critical audit matters have a similar effect in reducing negligence assessments for both evaluator types, and do not increase damage assessments.

Authors

• Timothy Brown, University of Illinois at Urbana–Champaign

• Tracie Majors, University of Illinois at Urbana–Champaign

• Mark Peecher, University of Illinois at Urbana–Champaign