Jury Verdicts Against Auditors under Precise and Imprecise Accounting Standards

TLDR: This paper conducted an experiment with 749 mock jurors to examine how juries evaluate auditor conduct under precise and imprecise standards and found that juries return more verdicts against auditors under imprecising standards than under precise standards, when the audit client's accounting is less aggressive and deviates from industry norms.

Abstract: U.S. auditors are concerned that the greater imprecision in accounting standards under IFRS will lead to increased legal liability. We conduct an experiment with 749 mock jurors to examine how juries evaluate auditor conduct under precise and imprecise standards. We find that juries return more verdicts against auditors under imprecise standards than under precise standards – but only when the audit client’s accounting is less aggressive and deviates from industry norms. These negative consequences are eliminated when the less aggressive accounting is instead consistent with industry norms, suggesting that auditors should be able to anticipate and avoid increased legal exposure under imprecise standards. We also find that when the audit client’s accounting is more aggressive, jurors return fewer verdicts against auditors under imprecise standards than precise standards. Taken together, our results suggest that imprecise standards are a double-edged sword that increases verdicts against auditors in some circumstances and decreases verdicts against auditors in other circumstances.