Does division of responsibility in the audit report act as a disclaimer to reduce auditor accountability?

• In Event: Client and Auditor Litigation

Abstract

We investigate whether the principal auditor’s decision to divide responsibility reduces the principal auditor’s accountability for an audit failure. Although clients are more likely to dismiss the principal auditor when the principal auditor divides responsibility, we find that shareholders are less likely to initiate restatement-related litigation against the company and that settlement amounts are smaller when auditors divide responsibility. Our findings indicate that adding division of responsibility language to the audit report does not lower auditor accountability for low-quality auditing, but does increase the risk of being dismissed as principal auditor – thus potentially explaining why auditors infrequently divide responsibility in their audit reports.

Authors

• Bethany Brumley, University of Illinois at Urbana-Champaign

• Keith Czerney, University of Missouri-Columbia

• Jaime J Schmidt, The University of Texas at Austin

• Anne Thompson, University of Illinois at Urbana-Champaign