Can Reporting Norms Create a Safe Harbor? Jury Verdicts Against Auditors Under Precise and Imprecise Accounting Standards

Abstract

We conduct an experiment with 749 mock jurors to examine whether juries evaluate auditors who allow the same client reporting differently under precise and imprecise standards. We find that the impact of standard precision on jury verdicts depends on the aggressiveness of the audit client’s financial reports and on the industry reporting norm. When the client’s reporting is more aggressive and violates the precise standard, juries return fewer verdicts against auditors under the imprecise standard, especially when the reporting complies with the industry norm. When the client’s reporting is less aggressive and complies with the precise standard, juries return more verdicts against auditors under the imprecise standard, but only when the client’s reporting is more aggressive than the industry norm. Compliance with industry reporting norms appears to provide auditors with safe harbor protection from negligence verdicts when accounting standards are imprecise.

Keywords: audit litigation, principles vs. rules, jury decision making, IFRS

JEL Classification: K13, M41