Independence Threats, Litigation Risk, and the Auditor's Decision Process

This study examines the effect of independence threats and litigation risk on auditors' evaluation of information and subsequent reporting choices. Using a Web‐based experiment, I tracked auditors' information gathering and evaluation leading to a going‐concern reporting decision. Specific...

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Bibliographic Details
Published in:Contemporary accounting research 2005, Vol.22 (4), p.759-789
Main Author: Blay, Allen D.
Format: Article
Language:English
Subjects:
Accountant independence
Accounting
Auditing
Auditor independence
Auditor reporting
Auditors
Audits
Behavioral decision theory
Decision making
Decision process
Going concern
Impact analysis
Independence
Liabilities
Litigation
Motivated reasoning
Risk
Studies
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Summary:This study examines the effect of independence threats and litigation risk on auditors' evaluation of information and subsequent reporting choices. Using a Web‐based experiment, I tracked auditors' information gathering and evaluation leading to a going‐concern reporting decision. Specifically, 48 audit managers assessed client survival likelihood, gathered additional information, and suggested audit report choices. I found that auditors facing high independence threats (fear of losing the client) evaluated information as more indicative of a surviving client and were more likely to suggest an unmodified audit report, consistent with client preferences. In contrast, auditors facing high litigation risk evaluated information as more indicative of a failing client and were more likely to suggest a modified audit report. In addition, the association between risk and report choice was fully mediated by final information evaluation. This suggests that it is unlikely that different reporting choices resulted from a conscious choice bias, but rather that motivated reasoning during evidence evaluation plays a key role in the effect of risk in auditor decision making.
ISSN:0823-9150
1911-3846
DOI:10.1506/5FQ9-ANEA-T8J0-U6GY