Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    Speak Up or Shut Up? The Moderating Role of Credibility on...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 06.0 Risk and Risk Management, Including Fraud Risk, 06.10 Impact of office size 
    89 Views
    Title:
    Speak Up or Shut Up? The Moderating Role of Credibility on Auditor Remedial Defense Tactics
    Practical Implications:

    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.

    Citation:

    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.

    Keywords:
    Auditor negligence; auditor independence; credibility; remedial defense tactics.
    Purpose of the Study:

    Audit firms face lawsuits worth hundreds of millions of dollars each year. Because of the litigation that they regularly face, audit firms are interested in how to best defend themselves in the courtroom. Audit firms may utilize remedial defense tactics (such as asserting compliance with standards and denying prior knowledge of undetected fraud) to attempt to reduce juror assessments of auditor negligence. The purpose of this study was to examine how the use of these tactics affects juror assessments of auditor negligence in lawsuits against audit firms. The other purpose of the study was to examine how factors that are related to the credibility of these defense tactics impact how effective the tactics are at influencing juror assessments of auditor negligence. The factors the authors examined included the following:

    • Client importance
    • The source of the defense tactic (the national or local office of the audit firm).

    The authors wanted to examine circumstances where the credibility of the remedial defense tactics was compromised which could possibly result in backfiring (higher, rather than lower, juror assessments of auditor negligence). 

    Design/Method/ Approach:

    The authors conducted an experiment sometime before November 2011 with undergraduate students that had no prior knowledge of the main issues of the case in order to simulate actual jurors in auditor negligence lawsuits. Participants read a case about a fictional company and its auditor and learned the details about the auditor negligence lawsuit. The participants rendered a verdict (negligent or not negligent), assessed the likelihood of negligence, and if they rendered a negligent verdict, assigned damages that they would require the audit firm to pay.

    Findings:
    • Participants’ assessments of auditor negligence are negatively associated with their perceptions of the remedial tactic’s credibility.
    • When client importance was low and the tactic was implemented by the firm’s national office, the examined remedial tactic was perceived to be credible and resulted in lower negligence assessments.
    • When client importance was low and the tactic was implemented by the firm’s local office, the remedial tactic was perceived as less credible, and did not result in lower negligence assessments.
    • When client importance was high, the remedial tactic was perceived to lack credibility, leading to backfiring with higher negligence assessments, irrespective of the tactic’s source (national versus local).
       
    Category:
    Independence & Ethics, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Litigation Risk