Dateline: August, 2008, Issue 3
To what standard of care do jurors hold auditors?
Legal negligence rules hold auditors responsible for plaintiff losses only when the quality of the audit that is provided fails to meet standards of care.
The standard of care is a minimum standard, and meant to be independent of the severity of the consequences of audit failure. The legal standard of care requires that auditors be evaluated based on the level of audit quality they provide, and not on the results of their actions. However, plaintiff attorneys often argue that if the auditor had performed more extensive tests, performed higher quality tests, or maintained a higher level of professional skepticism, the audit would have revealed material misstatements. Defense attorneys often argue that the additional procedures would not have been performed by other auditors and thus were not required.
Kadous (2000) explored whether the determination of the minimum standard of care by jurors is influenced by the seriousness of the consequences of audit failure. In this research, all jurors heard a negligence lawsuit that a client company's creditor had filed against an auditor. Half of the jurors learned that the plaintiff's losses from the audit failure were severe (firm failure, employees lost jobs, large investor and creditor losses), while the remaining jurors learned that the plaintiff's losses from the audit failure were moderate (large creditor losses, but firm acquired by another company and continued to operate).
Jurors did not apply the same uniform minimum standard of care for audits for severe and moderate consequences. When the consequences of audit failure were severe, jurors assessed higher standards of care for the type of audit tests auditors performed and for the level of professional skepticism auditors maintained while performing audits. Severe consequences enhanced the importance of omitted procedures, rendering less plausible defense arguments that these procedures were not required.
Interestingly, when the consequences of audit failure were severe, audit quality didn't matter: auditors who provided higher quality audits were evaluated just as negatively as those who provided lower quality audits. When audit failure led to only moderately negative consequences, auditors who provided higher quality audits received more favorable evaluations.
In sum, standards of care for auditors are moving targets in that they depend on the severity of the consequences of audit failure. Providing higher quality audits will not necessarily protect auditors from legal liability when the consequences of audit failure are severe.
Source Kadouse, K. (2000). The effects of audit quality and consequence severity on juror evaluations of auditor responsibility for plaintiff losses. The Accounting Review, 75, pp. 327-341.