Juror Perceptions of Auditor Liability after a Critical Audit Matter is Removed

• In Event: Auditor Scrutiny, Liability & Conservatism

Abstract

The balance between the information value of disclosing critical audit matters (CAMs) in the audit report, as proposed by the PCAOB (2016), and the litigation risk that may result, continues to be a concern for audit firms. We apply the Culpable Control Model (Alicke 2000) to conduct a 2x2 experiment with 336 U.S. jury-eligible participants. We include two levels of CAM disclosure in the year of a material misstatement (CAM reported or removed), and two levels of time elapsed since the auditor initially reported the CAM (one year or multiple years). Consistent with our prediction, we find jurors are more likely to find the auditor negligent when a CAM is removed than when a CAM continues to be reported. While the length of time a CAM is reported does not have a direct relationship with jurors’ assessments of auditor negligence, it does increase jurors’ counterfactual reasoning, which in turn increases perceived auditor culpable control and negligence assessments. Finally, jurors’ perceptions of auditor control mediate the relationships from both CAM removal and counterfactual reasoning to negligence assessments. We extend prior literature by identifying CAM removal as a factor that can increases auditors’ litigation risk. This is an important consideration because CAMs are not intended to be permanent, with the PCAOB (2016) emphasizing that CAMs must be evaluated each year.

Authors

• Jeremy Vinson, Clemson University

• Jesse C Robertson, University of North Texas

• Ronald Cameron Cockrell, Xavier University