Evidence on how different interventions affect juror assessment of auditor legal culpability and responsibility for damages after auditor failure to detect fraud

Prior research shows that, under realistic conditions, jurors overly harshly evaluate audit firm culpability when financial statement fraud emerges after issuance of a clean audit opinion. In two experiments, we test theory-based predictions that three topical regulatory factors can reduce jurors’ assessments of audit firm culpability as well as predictions about two key mediators through which these factors effectively operate. The three factors are an auditor judgment rule (AJR) prohibiting juror second-guessing of auditor judgments made in good faith and with a reasonable basis, a critical audit matter (CAM) disclosure in the audit report that pertains to the disputed area, and a juror negligence training (JNT) in which jurors learn and apply legal concepts before the case evaluation. The two mediators are jurors’ perceptions that the audit firm missed a readily detectable fraud (detectability) and tacitly assented to management's potentially fraudulent actions (acquiescence). Finally, we also test a “reactance-effects” prediction whereby, even while the AJR and JNT interventions decrease assessed auditor culpability on average, we expect the interventions will simultaneously increase assessed damages among the relatively small subset of jurors finding against the audit firm in their presence relative to jurors finding against the audit firm in their absence. Results support our predictions and also demonstrate that the mediators of perceived detectability and acquiescence can underlie these effects.