The results of this study have practical implications relating to auditor defense strategies. Results indicate that when negligence is alleged on high-importance clients, audit firms should be cautious about using remedial tactics to avoid inadvertently increasing juror negligence assessments by calling attention to the firm’s incentives to appease management (e.g., high audit fees). Rather, for high-importance clients, audit firms would likely benefit from procuring external firms or expert witnesses who may be perceived as more credible. Conversely, when negligence is alleged on low-importance clients, audit firms likely can reduce negligence assessments by utilizing various remedial tactics (e.g., preemptively denying prior knowledge of an undetected fraud). Lastly, results indicate that, if possible, audit firms should implement remedial tactics at the national, as opposed to local, office level.
Grenier, J., B. Pomeroy, and A. Reffett. 2012. Speak Up or Shut Up? The Moderating Role of Credibility on Auditor Remedial Defense Tactics. Auditing: A Journal of Practice and Theory 31(4): 65-83.
The findings of this study should be of interest to regulators, audit standard-setters, accounting firms, and investors because they provide a method to infer the overall quality of an auditor office location though the use of easily obtainable and publicly available information on restatements. This information can be used to identify offices where audits are more likely to be of lower quality, and to develop standards that emphasize the potential for quality-control problems in the offices of multi-location audit firms. Investors may be able to use it as one piece of additional information with which to infer something about the earnings quality of a particular company based on the history of the auditor office that performs the audit.
For more information on this study, please contact Jere R. Francis.
Francis, J. R., and P. N. Michas. 2013. The Contagion Effect of Low-Quality Audits. The Accounting Review 88 (2).