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    Apology Accepted: The Benefits of an Apology for a Deficient...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, last edited October 20, 2014, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk 
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    Title:
    Apology Accepted: The Benefits of an Apology for a Deficient Audit Following an Audit Failure
    Practical Implications:

    The results of this study are important for firms to consider given the recent and historical problem of rising litigation costs. Firms are likely to be targets of lawsuits following the revelation of fraud within a client’s financial statements regardless of whether the firm was complicit in the fraud. Even lawsuits that are settled quickly result in high litigation costs, and the reputational costs to the firm can be just as problematic as the monetary costs. Very few audits are “perfect,” particularly when examined in hindsight. This study suggests that there are benefits to a firm being honest and apologetic about any deficiencies in an audit when the deficiencies do not relate to the fraud itself.

     

    For more information on this study, please contact Jason Rasso.

    Citation:

    Rasso, J. T. 2014. Apology accepted: The benefits of an apology for a deficient audit following an audit failure. Auditing: A Journal of Practice & Theory 33 (1): 161-176.

    Keywords:
    Auditor Litigation, Apology, Reputation
    Purpose of the Study:

    This paper examines the use of an apology for conducting a deficient audit that indirectly leads to an audit failure. Audit failures can be costly to accounting firms in terms of litigation costs and reputational harm. These costs are potentially much higher when the audit failure stems from a deficient audit. The author tests whether the use of an apology containing various components (expression of sympathy, acceptance of responsibility, and/or promise to refrain) is beneficial or harmful to an accounting firm. The results reveal that only the expression of sympathy has an effect on assessments of punishment. However, combining all three apology components leads to a significantly higher perception of the accounting firm’s reputation. This paper is one of very few papers that examines mechanisms that can help protect firm’s reputations.

    Design/Method/ Approach:

    The research evidence is collected in the time period 2011 – 2012. The author collected responses from the general public via Amazon Mechanical Turk. The participants read about the history of an accounting firm, then read a newspaper article identifying a major accounting fraud in which the accounting firm is named as the auditor. The participants then read an apology that contains one, two, or all three of the apology components (one group does not read an apology) and then are asked to rate their support for a lawsuit against the firm, the level of fine they would recommend for the firm, and their perceptions of the firm’s reputation.

    Findings:
    •  An apology containing only an expression of sympathy is the only version of an apology that results in lower support for a lawsuit and a lower fine recommendation when compared with the group that does not view an apology.
    • There is a steady increase in perceptions of a firm’s reputation that can be seen as more components are added to an apology, with an apology containing all three components yielding the highest perception of the firm’s reputation.
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Litigation Risk