The Effects of Critical Audit Matter Removal and Duration on Jurors' Assessments of Auditor Negligence

Abstract

SUMMARY A primary concern facing the PCAOB's requirement of disclosing critical audit matters (CAMs) is increased auditor litigation risk. Evidence with Key Audit Matters from the U.K. indicates auditors may subsequently remove a CAM or continue to report the same CAM for several years. Therefore, we investigate the effects of CAM removal and duration on jurors' assessments of auditor negligence when there is a subsequent material misstatement due to fraud in the account related to the CAM. Using the Culpable Control Model, we predict jurors will assess higher auditor negligence when a CAM is removed than when a CAM is reported and when a CAM is reported for multiple years than for one year. Results from two experiments support our expectations, although results vary depending on complexity of the misstated account. Overall, our findings highlight a quandary for audit firms, where subsequent removal of a CAM increases auditor liability.

The Effects of the Internal Control Opinion and Use of Audit Data Analytics on Perceptions of Audit Quality, Assurance, and Auditor Negligence

“…Our study also provides avenues for future research on the effects of audit testing disclosure and complements prior and contemporaneous research on the use of technology to enhance the audit process (e.g., Brown-Liburd et al 2015;Barr-Pulliam 2018;Rose et al 2017;Rose et al 2019). Lastly, our study supports the supposition in Bakckof (2015) and subsequent research by Vinson et al (2018) and Gimbar et al (2016) that the Culpable Control Model (Alicke 2000) is a useful framework for examining factors that influence perceptions of auditor negligence in contextually-rich settings. Verdict is a binary measure where Not Guilty = 0 and Guilty = 1.…”

The Sound of Silence: What Does a Standard Unqualified Audit Opinion Mean Under the New Going Concern Financial Accounting Standard?

“…Recent research also demonstrates that the removal of CAMs from audit reports may increase jurors' assessments of auditor negligence (Vinson, Robertson, and Cockrell 2018). The results of our study demonstrate that CAMs can be useful for shedding light on the auditor's consideration of uncertain outcomes (e.g., a client's bankruptcy), which reduces auditor liability.…”

The consequences of disclosing key audit matters (KAMs): A review of the academic literature

“…The second category focuses on auditor responses investigating KAM effects on auditor judgement, audit fee and audit quality (Reid et al 2018;Gutierrez et al 2018;Almulla and Bradbury 2018;Li et al 2018;Bédard et al 2018; Asbahr and Ruhnke 2017, Ratzinger-Sakel and Theis 2018). The third category of papers examines whether the disclosure of KAMs will affect jurors' assessments of auditor liability (Brasel et al 2016;Kachelmeier et al 2018;Brown et al 2016;Gimbar et al 2016;Backof et al 2018;Vinson et al 2018). Finally, we review a handful of studies that investigate how management reporting practices are affected by (anticipated) KAM disclosures (Cade and Hodge 2014;Bentley et al 2018;Klueber et al 2018).…”