The Case of Undetected Fraud: Can Audit Firm Policies or Highlighting the Fraud Examiner's Role Reduce Juror Assessments of Auditor Negligence?

This study explores two potential safeguards against liability when auditors exercise professional skepticism, but do not detect a fraud: (1) a firm policy requiring a specific level of professional skepticism in high-risk audit areas, and (2) providing jurors with key differences between the role of a fraud examiner and the role of an auditor as a reference point for judging the auditor's performance. We find that describing a specific firm policy to jurors does not significantly decrease negligence findings for auditors who do not detect a fraud. However, providing the role of a fraud examiner as a reference point (e.g., scope of work, testing approaches) does significantly decrease negligence findings. Encouragingly, we also find some evidence that jurors are apt to decrease negligence findings when auditors exercise higher skepticism, but ultimately do not detect a fraud. Data Availability: Contact the authors.