When assuming less responsibility backfires : the effects of audit responsibility assignment, audit failure location, and engagement partner signature on auditor legal liability

Abstract

This thesis examines the effects of audit responsibility assignment (divide versus assume), audit failure location (lead versus participating audit firm), and engagement partner signature (present versus absent) on jurors’ evaluations of auditor legal liability. The PCAOB recently proposed two auditing standards amendments regarding how the lead audit firm assigns audit responsibility in group audits, and whether the engagement partner of the lead audit firm signs the group audit report in his/her personal name. This thesis finds that relative to assuming full audit responsibility for the entire audit engagement, dividing audit responsibility with the participating audit firm reduces the lead audit firm liability when the audit failure is found in the audit area of the participating audit firm. Dividing audit responsibility thus appears beneficial for the lead audit firm but actually comes with costs: it increases the lead audit firm liability when the audit failure is found in the audit area of the lead audit firm. Further, this thesis finds that an engagement partner signature generally reduces jurors’ negligence verdicts because signing an audit report with the engagement partner’s name increases jurors’ assessments of auditor credibility.