The Ticking Time Bomb: Population Testing and Jurors' Assessments of Auditor Negligence

• In Event: Technology and Auditor Liability

Abstract

Audit data analytics (ADA) allow auditors to examine entire populations of client data for anomalies (i.e., population testing). While population testing has the potential to enhance the quality of audits, little research exists regarding its implications on auditor liability. Accordingly, we conduct an experiment to examine the possibility that population testing creates significant litigation exposure when materially misstated transactions are flagged as anomalies but are not selected for further testing (a “ticking time bomb” according to an interviewed audit practitioner). Combining theory on counterfactual reasoning and persuasion, we predict that when auditors emphasize a data-driven audit approach, jurors will assess higher auditor negligence when misstatements were initially flagged as anomalies by the ADA (vs. not flagged), but this effect is reduced when auditors emphasize professional judgment in their audit approach. Results are stronger than expected as emphasizing use of professional judgment not only reduces but eliminates the litigation exposure associated with flagged but not tested transactions (i.e., defuses the time bomb that manifests with a data-driven emphasis). Cumulatively, our study demonstrates how the emphasis on certain elements of an audit approach influences jurors’ auditor negligence assessments, and the litigation exposure associated with ADA. These results have important implications for audit practice and regulation, the legal system, and future research.

Authors

• Blake Holman, University of Kentucky

• Jenny Ulla, University of Nevada - Las Vegas

• Jonathan H Grenier, Miami University

• D. Jordan Lowe, Arizona State University - Tempe