Does the Change to Principles-Based Accounting Increase Juror Assessments of Auditor Liability?

Abstract

This chapter investigates whether jurors, in their attribution of auditor responsibility, may be inappropriately influenced by the client use of a principles-based accounting standard, even if this standard is properly applied. Following prior research on questionable auditor conduct and its subsequent evaluation by juries, which is often subject to hindsight and outcome bias, this chapter examines whether an auditor's legal liability increases when its client uses principles-based accounting standards, by conducting a controlled experiment with 124 qualified jurors serving a county circuit court. Each juror is properly instructed and provided one of four different cases, obtained by manipulating two levels of an accounting standard, one principles-based and one rules-based, and by manipulating two subsequent client-loss outcomes, one moderately negative and one severely negative. This study finds jurors evaluate auditors more negatively if auditors have relied on a principles-based accounting standard. This attribution is influenced by hindsight bias and the perceived risk-taking responsibility of the investor, but independent of the client-loss outcome severity. These results contribute to the discussion of adopting or converting to the principles-based International Financial Reporting Standards (IFRS) by the United States.

Citation

Sennetti, J.T., Becker, C.P. and Lawrence, H.J. (2011), "Does the Change to Principles-Based Accounting Increase Juror Assessments of Auditor Liability?", Arnold, V., Bobek, D., Clinton, B.D., Lillis, A., Roberts, R., Wolfe, C. and Wright, S. (Ed.) Advances in Accounting Behavioral Research (Advances in Accounting Behavioural Research, Vol. 14), Emerald Group Publishing Limited, Leeds, pp. 165-189. https://doi.org/10.1108/S1475-1488(2011)0000014010