The Effects of Audit Risk and Litigation Risk on Decision Aid Reliance

Abstract

The purpose of the current study is to examine the extent to which audit risk and litigation risk cause auditors to increase reliance on decision aids. These are particularly relevant issues in the era of Sarbanes-Oxley and abundant audit litigation, as decision aids hold the potential to improve audit quality; yet, immense legal and regulatory pressures on audit firms to improve audit quality could lead to a 'check list' mentality where auditors subordinate their audit judgments for the sake of compliance. Based on an experiment involving 118 audit practitioners, we find that auditors rely more on decision aid recommendations when either litigation risk (exogenous to the audit risk model) or internal control risk (endogenous to the audit risk model) is high relative to low. When litigation risk and internal control risk are simultaneously high, there is an interactive effect on decision aid reliance. Further analyses suggest that litigation risk amplifies the auditors' awareness of legal defensibility, which in turn increases decision aid reliance. Disturbingly, when both litigation risk and control risk are high, the auditors appear to deferentially follow the aid's advice to increase the legal defensibility of their decisions, even as their confidence in the quality of their decisions deteriorates.

Keywords: litigation risk, internal control risk, decision aid reliance

JEL Classification: M49, M41, G38, C92