Mitigating the auditor’s legal risk

“The definition of auditing calls for the communication of the degree of correspondence between assertions and established criteria” [ASOBAC, 1973]. As the profession has rejected adoption of universal quantitative definitions of materiality as infeasible [FASB, 1979], Don Leslie [1984] recommended adoption of a standard requiring disclosure of specific engagement materiality thresholds in the auditor’s report. This study examines how such disclosures might affect perceptions of an auditor’s culpability and liability in instances where post publication errors are discovered which alternately aggregate to more or less than reported materiality thresholds. A behavioral experiment was conducted in which eighty-seven U.S. general jurisdiction judges participated. Findings support the potential for meaningful modifications to the standard auditor’s report to reduce perceived auditor liability but also note the importance of jurists’ pre-experimental attitudes and beliefs respecting the public accounting profession.