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This study examines the effects of key audit matter (KAM) disclosures in auditors' reports on auditor liability in cases of fraud and error misstatements using evaluators…
This study examines the effects of key audit matter (KAM) disclosures in auditors' reports on auditor liability in cases of fraud and error misstatements using evaluators with audit experience.
The experiment is conducted using 174 professional auditors as participants.
The participating auditors assess higher auditor liability when misstatements are related to errors rather than when they are related to fraud. In addition, the results also demonstrate that KAM disclosures reduce auditor liability only in cases of fraud and not in cases of errors. Together, the results support the view that KAM reduces the negative affective reactions of evaluators, which in turn, reduce the assessed auditor liability.
This study did not analyze the setting in which auditors who act as peer evaluators had an opportunity to discuss the case among their peers, which may have affected their judgments.
The results of KAM disclosures on auditor liability in cases of error and fraud misstatements inform auditors that, different from the auditors' concern that disclosing KAM may increase auditors' legal risk, it tends to decrease or at least have no impact on the liability judgment.
This study contributes to the accounting literature by adding findings on another aspect of KAM in different audit settings, particularly, in the Thai legal environment with different types of undetected misstatements. The current conflicting results on how KAM disclosures affect auditor liability warrant further investigation of this issue in other audit contexts in different countries.
Compares auditors’ legal liability to third parties in several major countries, with principal emphasis on comparisons between the USA and the UK. Public accountants claim…
Compares auditors’ legal liability to third parties in several major countries, with principal emphasis on comparisons between the USA and the UK. Public accountants claim that they are being adversely affected by lawsuits brought by shareholders, creditors and other third parties. It has been asserted, without any specific evidence, that increased exposure to legal liability has caused public accounting firms to cease the practice of auditing or go out of business entirely. Details auditors’ legal liability to third parties in the USA and Europe and, in particular, the UK. Concludes by reviewing certain positions taken by the Fédération des Experts Comptables Européens with respect to auditors’ legal liability in the face of European economic and political union.
This paper investigates the perceptions of senior auditors in large firms in Australia, Malaysia and New Zealand concerning sources of auditor legal liability, what should…
This paper investigates the perceptions of senior auditors in large firms in Australia, Malaysia and New Zealand concerning sources of auditor legal liability, what should constitute auditors’ duties and what may be done to reduce litigation exposure. Results are consistent with our conjecture that professional and organisational culture dominates perceptions, even in the presence of quite strong jurisdictional, cultural and institutional differences. The analysis indicates that auditors’ perceptions are strongly affected by international trends, while cultural and institutional effects tend to be more subtle but are identified by detailed and focused analysis.
Examines the legal environment of the UK, Canada, Australia, New Zealand and the USA with respect to auditor liability. Provides an understanding of the legal risks to…
Examines the legal environment of the UK, Canada, Australia, New Zealand and the USA with respect to auditor liability. Provides an understanding of the legal risks to accountants associated with third‐party uses of audited financial statements by contrasting accounting liability for negligent misrepresentation in various US settings with those of the four other nations. Liability pressure has been very acute and litigation in the five countries has increased. Evidence supports a trend towards limiting third‐party liability to accountants.
The Hong Kong Society of Accountants proposes to allowincorporating audit practices in Hong Kong. Finds that auditors areanxious about their increasing risk and the legal…
The Hong Kong Society of Accountants proposes to allow incorporating audit practices in Hong Kong. Finds that auditors are anxious about their increasing risk and the legal liabilities of their work, believing that incorporation is the best method to protect their interests. Many auditors believe that the profession should place the public interests at the top but the interests of the profession should also be protected. Therefore incorporation of the audit practice is necessary in Hong Kong, but strict rules should be imposed to prevent abuse. In addition, finds that clients are not concerned about this issue. The bankers will give a lower value to the audited financial statements issued by incorporated audit firms. In implementation, the professional indemnity insurance and the minimal capital requirement will become the key concern of auditors to incorporate their audit firms.
Believes that the rapid development of the market system in the People’s Republic of China should encourage Chinese certified public accountants (CPAs) to examine…
Believes that the rapid development of the market system in the People’s Republic of China should encourage Chinese certified public accountants (CPAs) to examine themselves and recognize the importance of exercising due professional care, in order to develop in an international and healthy manner. Because the time of reconstructing the CPAs system in China is short, most attention is paid to how the CPAs profession can develop rapidly and to general professional management. However, the lack of consciousness of what “due care” is and what comprises the legal standards of due care contributes to confusion about its role. Feels that in order to promote the consciousness of audit liability, the law needs perfecting, and technical standards, audit theory, and court procedures need improvement before resolution of the auditors’ liability issue can be achieved.
Commentators express concern that when auditors investigate for but fail to detect fraud, jurors might effectively penalize the auditors for having investigated for the…
Commentators express concern that when auditors investigate for but fail to detect fraud, jurors might effectively penalize the auditors for having investigated for the fraud (AICPA, 2004; Coffee, 2004; Golden, Skalak, & Clayton, 2006). Consistent with these concerns, Reffett (2010) finds that, in a between-participants setting, evaluators in cases of undetected fraud are more likely to hold auditors liable for damages when the auditors identified the perpetrated fraud as a fraud risk and then investigated for the fraud, relative to when the auditors did neither. What remains unclear, however, is the extent to which identifying versus investigating fraud risks increases evaluators’ between-participants assessments of auditor liability. That is, when auditors investigate for, but fail to detect fraud, is the increase in evaluators’ liability assessments due to the fact that the auditors identified (i.e., were aware of) the fraud risk but did not detect the fraud, or that the auditors unsuccessfully investigated for the fraud (or both)? This study addresses these questions by reporting evidence that both identifying and investigating fraud risks can each, in isolation, increase evaluators’ perceptions of auditor negligence. The processes by which identifying and investigating fraud risks increase evaluators’ negligence verdicts, however, appear to differ.
This paper aims to examine the different perspectives of auditors and non-auditors on this question, along with the rationale and impact of these differences. Chinese…
This paper aims to examine the different perspectives of auditors and non-auditors on this question, along with the rationale and impact of these differences. Chinese company law requires an audit report on paid-up capital when business entities are newly formed or their capital altered, which raises questions regarding the liability of auditors should the business entities fail.
Interviews and a questionnaire survey were conducted to analyse how legislation can impact on interested parties in a relatively immature audit environment. The theories of social construction of reality and symbolic interactionism are used as a basis for explaining the different conceptions of capital verification held by interested parties.
There is a mismatch between the purpose of capital verification and the functions of paid-up capital. Paid-up capital is not a reliable indicator of business liquidity and creditworthiness. Auditors and non-auditors have different understandings about the assurance provided by paid-up capital at the point of company formation or auditing field work, and at the point of actual trading after the company formation or auditing field work. They also differ on the causation between deficient capital verification reports and trading loss. The liability crisis adversely influenced auditors’ perception of the capital verification service, although it did not lead to outright rejection by them.
This paper describes an important compliance auditing service in China. By conducting an analysis of the conflicting views of auditors and non-auditors on capital verification, it contributes to the existing literature on the sources of disputes between auditors and other stakeholders, and the efforts to establish a balanced auditor liability regime.
“The definition of auditing calls for the communication of the degree of correspondence between assertions and established criteria” [ASOBAC, 1973]. As the profession has…
“The definition of auditing calls for the communication of the degree of correspondence between assertions and established criteria” [ASOBAC, 1973]. As the profession has rejected adoption of universal quantitative definitions of materiality as infeasible [FASB, 1979], Don Leslie  recommended adoption of a standard requiring disclosure of specific engagement materiality thresholds in the auditor's report. This study examines how such disclosures might affect perceptions of an auditor's culpability and liability in instances where post publication errors are discovered which alternately aggregate to more or less than reported materiality thresholds. A behavioral experiment was conducted in which eighty‐seven U.S. general jurisdiction judges participated. Findings support the potential for meaningful modifications to the standard auditor's report to reduce perceived auditor liability but also note the importance of jurists' pre‐experimental attitudes and beliefs respecting the public accounting profession. In 1985, the Canadian Institute of Chartered Accountants published Materiality: The Concept and its Application to Auditing [CICA, 1985]. In that research study, Don Leslie focused on his perceptions of the communication deficiencies of the standard form audit report used in Canada and the U.S. — the most critical of which he found to be the continuing lack of a quantitative definition of materiality. Leslie's remedy for the problem was novel and controversial even if his recognition of this problem was not without precedent. Leslie did not recommend the prompt adoption of universal, quantitative materiality standards (a proposal which has stalemated progress in the profession for years) but rather adoption of a standard making it compulsory that auditors disclose their individual materiality standards, whatever they may be, on each specific audit, in the audit report. To date, no serious research has examined this proposal since the report's publication, and yet the costs of the communications gap between accounting/auditing professionals and the public seem to be getting greater. The Auditing Standards Board recently readdressed the communications provided by the standard form audit report. One of the clearest observa‐tions to emerge from those deliberations was that there is a lack of reliable research data upon which to base regulatory decisions in this area [Elliott and Jacobson, 1987]. This paper contributes to reduce that vacuum. Specifically, on the following pages we outline the genesis of a research project and the findings of that study in which eighty‐seven (87) U.S. judges evaluated whether and to what degree an altered form of the audit report (including quantitative definition of materiality) would reduce the assessed culpability and legal liability of auditors. The remaining sections of this paper are organized as follows: in section one, we will summarize representative recent relevant literature; in section two, we develop testable hypotheses from that background literature; in section three, we provide a description of the design of our study; in section 4, our findings are reported and in section 5 we discuss implications for practice and future research.