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    Malleable Standards of Care Required by Jurors When...
    research summary posted June 26, 2017 by Jennifer M Mueller-Phillips, tagged 06.09 Litigation Risk, 11.07 Attempts to Measure Audit Quality 
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    Title:
    Malleable Standards of Care Required by Jurors When Assessing Auditor Negligence
    Practical Implications:

    This study is relevant for practitioners, investors, and regulators. It demonstrates to firms that the effectiveness of high audit quality as a defense in litigation may be decreased depending on the timing of jurors’ assessment of SOC. One way to try and lower the probability of jurors’ assessing SOC after receiving audit knowledge is to warn the jury about the potential affects. Simply changing the jurors’ instructions has been found to mitigate the outcome effects.

    Citation:

    Maksymove, Eldar M., and M. W. Nelson. 2017. “Malleable Standards of Care Required by Jurors When Assessing Auditor Negligence”. The Accounting Review. 92.1 (2017): 165.

    Keywords:
    auditor liability; jury; audit quality; mediation; anchoring; sample size; audit adjustment
    Purpose of the Study:

    In court cases against auditors due to audit failure, often times the main defense used is that there was a high audit quality. This is true if the audit was performed at a level similar to what prudent auditors would have done in the same circumstances, also known as standard of prudent care (SOC). This study examines whether jurors’ definition of SOC is malleable based on the timing of the SOC assessment in accordance with the jurors’ exposure to the audit quality of the case. Specifically, whether or not the juror learns of audit quality first and then assesses SOC, or vice versa. 

    Design/Method/ Approach:

    The research project contains four experiments. The first experiment is a simulation where 125 participants, found using Amazon’s Mechanical Turk (AMT), are asked to assume the role of jurors who are considering a case of alleged auditor negligence. The level of audit quality and the timing of jurors’ SOC assessments are manipulated. In the subsequent three experiments 60-63 of the previous participants were asked to determine SOC based on the level of audit quality being manipulated and a change in some of the background information.

    Findings:

    Overall, the authors find that the timing of the SOC assessment in accordance with the jurors’ exposure to the audit quality of the case does in fact change the outcome of the SOC assessment. Therefore, the results indicate the jurors SOC assessments are malleable.

    The authors find the following:

    • In situations where SOC is determined prior to jurors learning about the audit quality of the case, the verdict better discriminates between high and low-quality auditors. This is due to the fact that the audit quality of the case cannot affect the jurors’ decision of what SOC should be.
    • On the other hand, when SOC is assessed after jurors learn about the audit quality of the case, it can cause SOC assessments to vary. This leads to inconsistent rulings of whether or not the auditor was negligent.
    • The reasoning behind the second situation is as follows. The jurors’ knowledge of higher audit quality in the case directly lowers the negligence judgment. However, when doing the SOC assessment after learning about the higher audit quality, the jurors raise SOC. This then increases the negligence judgment. The authors refer to this effect as competitive mediation. 
    Category:
    Audit Quality & Quality Control, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Attempts to Measure Audit Quality, Litigation Risk
    Home:

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