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The Effects of Accounting Standard Precision, Auditor Task Expertise, and Judgment Frameworks on Audit Firm Litigation Exposure

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  • Jonathan H. Grenier
  • Bradley Pomeroy
  • Matthew T. Stern

Abstract

Recent research suggests that adopting imprecise accounting standards elevates audit firm litigation exposure and could undermine auditor objectivity if audit firms respond by herding to industry norms. This paper reports the results of two experiments that demonstrate how audit firms can effectively mitigate the elevated litigation exposure without herding to industry norms by staffing engagements with recognized technical experts, using judgment frameworks and automated decision aids, and providing persuasive evidence of adherence to auditing standards. We find that judgment frameworks are particularly well†suited for defending judgments under imprecise standards, and represent a cost†effective alternative to using technical experts. However, our results also indicate that judgment frameworks may provide a safe harbor for relatively low†quality judgments when those frameworks are used under precise standards. We discuss implications for audit firms, courts, and regulators that currently conduct or evaluate audits within and across jurisdictions where the precision of accounting standards varies considerably.

Suggested Citation

  • Jonathan H. Grenier & Bradley Pomeroy & Matthew T. Stern, 2015. "The Effects of Accounting Standard Precision, Auditor Task Expertise, and Judgment Frameworks on Audit Firm Litigation Exposure," Contemporary Accounting Research, John Wiley & Sons, vol. 32(1), pages 336-357, March.
    • Handle: RePEc:wly:coacre:v:32:y:2015:i:1:p:336-357
    DOI: 10.1111/1911-3846.12092
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    Cited by:

    1. William D. Brink & Jonathan H. Grenier & Jonathan S. Pyzoha & Andrew Reffett, 2019. "The Effects of Clawbacks on Auditors’ Propensity to Propose Restatements and Risk Assessments," Journal of Business Ethics, Springer, vol. 158(2), pages 313-332, August.
    2. Paolo Candio, 2023. "On the role of cost-effectiveness in accounting," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2023(2 Suppl.), pages 215-225.
    3. Ana Isabel Morais & Inês Pinto, 2023. "Does the Level of Enforcement Shape the Complexity in Accounting Standards?," IJFS, MDPI, vol. 11(1), pages 1-17, February.
    4. Yanming Cao & Zhongwei Zhao & Ning Wang & Liming Zhao, 2022. "Sustainable Development of Audit Market: Benefits of Audit Price Deregulation in China," Sustainability, MDPI, vol. 14(16), pages 1-15, August.
    5. Backof, Ann G. & Bamber, E. Michael & Carpenter, Tina D., 2016. "Do auditor judgment frameworks help in constraining aggressive reporting? Evidence under more precise and less precise accounting standards," Accounting, Organizations and Society, Elsevier, vol. 51(C), pages 1-11.
    6. Matringe, Nadia & Power, Michael, 2024. "Memories lost: A history of accounting records as forms of projection," Accounting, Organizations and Society, Elsevier, vol. 112(C).
    7. Brown, Timothy & Majors, Tracie M. & Peecher, Mark E., 2020. "Evidence on how different interventions affect juror assessment of auditor legal culpability and responsibility for damages after auditor failure to detect fraud," Accounting, Organizations and Society, Elsevier, vol. 87(C).
    8. Matringe, Nadia & Power, Michael, 2024. "Memories lost: a history of accounting records as forms of projection," LSE Research Online Documents on Economics 120410, London School of Economics and Political Science, LSE Library.
    9. Joseph A. Johnson & Patrick R. Martin & Bryan Stikeleather & Donald Young, 2022. "Investigating the Interactive Effects of Prosocial Actions, Construal, and Moral Identity on the Extent of Employee Reporting Dishonesty," Journal of Business Ethics, Springer, vol. 181(3), pages 721-743, December.

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