The Impact of a Higher Intent Standard on Auditors' Legal Exposure and the Moderating Role of Jurors' Legal Knowledge
Year: 2016
Type: preprint
Abstract: We conduct an experiment to examine the joint effect of two potential reforms to auditor litigation: a higher intent standard and changes to case evaluators. Examining a higher intent standard (i.e., a standard explicitly incorporating good versus bad faith) is important as it has been proposed as a way to attenuate jurors’ second-guessing of difficult professional judgments made by auditors. While a variety of changes to case evaluators have been proposed, we examine the impact of an incremental change that would potentially be more palatable to regulators: increasing evaluators’ legal knowledge. Capturing task-relevant knowledge differences is a key principle from the expertise paradigm (Libby and Luft 1993), and we predict differences in evaluators’ legal knowledge to moderate the degree to which changing from an ordinary negligence standard to a higher intent standard alters evaluators’ assessments of auditor culpability. Consistent with predictions, a higher intent standard more substantially reduces negligent verdicts for evaluators with less legal knowledge (lay jurors), relative to evaluators with more legal knowledge (law students). However, also consistent with predictions, a higher intent standard comes with the cost of greater damages assigned by the subset of lay jurors who, despite a higher intent standard, still find the auditor negligent. Our findings highlight that the effects of implementing a higher intent standard are a complex tradeoff.
Source: SSRN Electronic Journal
Authors: Tim Brown, Tracie M. Majors, Mark E. Peecher
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2512957695