The Impact of Auditor Reputation on Juror's Assessment of Auditor Liability in a Limited Liability Regime: Financially Important Nonpublic Clients

• In Event: SESSION 7C: Ethics, Auditing, and the Law

Abstract

AICPA Ethics Interpretation 501-8 permits the use of limitation of liability clauses in jurisdictions where they are allowed (AICPA 2013). This study advances Brandon and Mueller’s (2006) research to examine the impact of auditor reputation on jurors’ perceptions of auditor liability when the client is financially important. The results indicate that auditors with a reputation for high quality are perceived as being more objective and more independent than auditors with a reputation for low quality. However, the auditor’s reputation neither significantly impact jurors’ evaluation of auditor liability, nor does it significantly reduce the incidence of punitive damages assigned to the auditor. Surprisingly, auditors with a reputation for high quality are punished more harshly following an audit failure in the presence of a limitation of liability clause. Hence, auditors with a reputation for high quality should be conservative in their use of limitation of liability clauses with going concern clients.

Author

• Reginald Wilson, Southern University at Baton Rouge