Better sooner than later? Effects of adopting drone-enabled inventory observation on auditor liabilities

This paper presents a model in which a firm's owner, an auditor, and outside investors strategically interact. The owner's investment in the quality of the firm's internal control system and the auditor's effort jointly affect the informativeness of the auditor's report on the firm's financial statements. If the auditor's legal liability to investors is large, then an efficiency loss arises because the owner underinvests in the internal control system and the auditor overinvests effort. On the other hand, if the liability is small, then an efficiency loss arises from the owner's overinvestment and the auditor's underinvestment. Regulators can improve allocative efficiency by changing the auditor's legal liability. However, in our model, it is impossible to completely eliminate the efficiency loss by changing the auditor's liability alone, because no damage award can induce both the owner and auditor to make socially optimal investments in the internal control system and audit effort. We also interpret recent changes in the regulatory environment in the context of our model.

Monetary Caps on Damages Due to the Liability of Auditors for Audit Failures in Publicly Listed Companies - Subtitle: A Comparative Legal Analysis between Common Law and Civil Law Regimes in Countries, Which Have Capping Damage Awards of Auditors

This laboratory market study examines the potential effect of increasing auditors' liability on firms' new investments. The experimental hypotheses are derived from Shibano's 2000 model, which predicts that an increase in auditors' liability will decrease the frequency of audit failures and may decrease firms' new investments if the liability level is “excessive”. Results from three experimental market settings (with low, medium, and high liability levels) suggest two major conclusions. First, firms' new investments increase significantly when auditors' liability level increases from low to medium, and decrease significantly as the liability level increases from medium to high. This result provides support for the argument that adequate auditor liability is necessary to motivate firms to invest in new projects. Excessive liability, however, may discourage firms from making new investments. Second, the frequency of audit failure decreases insignificantly when auditors' liability increases. These two results have an important policy implication: the benefit of imposing high liability on the auditor (i.e., an insignificant decrease in audit failure) may be more than offset by its cost (i.e., a significant decrease in new investments).

The introduction of expert systems technology into the audit environment has opened a new avenue of auditor legal liability. This paper examines the potential impact expert systems will have on auditor liability. The presentation of this new avenue of auditors' legal liability explores both the potential for litigation under failure of auditor/expert system collaboration to yield prudent decisions and the failure to use an available expert system. The risks evolving from failure to use an available expert system include the possibility that the system could be used against the auditor in the courtroom. While case law will ultimately determine the bounds of this liability, this paper acquaints the reader with the important legal issues involved and the varied outcomes that could emerge. It should also be noted that while the specific example presented in this paper relates to the audit profession, the legal concepts are of equivalent concern to other professions enduring broad implementation of expert systems.

Legal liability: Exploring instrumental reasoning and the evolution of the auditor's duty

The importance of the concept of "generally accepted accounting principles" lies

Rapid technological advancements have driven the increasing complexity of warfare, positioning unmanned aerial vehicles (UAVs), or drones, at the forefront of military operations globally. This study examines Nigeria's adoption of drone technology in its fight against insurgencies, banditry, and communal violence. As part of its evolving security strategy, Nigeria has integrated drones into its military operations to enhance intelligence gathering, surveillance, and precision strikes. Despite the operational benefits, the use of drones raises ethical concerns, especially related to civilian casualties, and poses challenges due to limited transparency and regulatory oversight. The study employed a systematic literature review (SLR), drawing on secondary data sources and reports that address the role, effectiveness, and challenges of drones in Nigeria's defense strategies. Key findings highlight that Nigeria's military, particularly the Air Force, has successfully deployed both indigenous and foreign-acquired drones, such as the Amebo, Gulma, and Chinese CH-4, to bolster its intelligence and combat operations. However, the lack of a robust legal framework and the need for improved training and data processing infrastructure hinder the full realization of drone technology's potential. Based on the findings, the study recommends enhancing Nigeria's regulatory framework to ensure ethical drone deployment, investing in indigenous UAV development, and improving inter-agency coordination for more efficient use of drone capabilities. These steps are crucial to ensuring that drones can effectively contribute to Nigeria's national security while minimizing the associated risks.

We examine the recent history and trends of U.S. auditor liability to third parties to help regulators and legislators develop policies to protect and maintain audit quality while limiting auditor liability exposure. Although the United States has yet developed a formal policy to address auditor liability, some European Union member countries and Australia, in varying degrees, support such limitation. Thus, we also explore current EU and Australian policies as examples of potential recommendations to U.S. policy makers. In light of a litigious environment, U.S. Certified Public Accounting firms generally accept potential clients only after analyzing potential risks, dismiss many risky clients, raise their total or hourly fees, spend more time examining attestation evidence, and perform other procedures to reduce their litigation risk. This risk arises largely from the federal and state legal systems, assuming that auditors can better absorb and control losses from misleading financial statements than can financial statement users. While culpable, this litigious environment led to the demise of two large international Certified Public Accounting firms—Arthur Andersen and Laventhol & Horwath. Is the global economy better off having fewer accounting firms with the capacity to perform international audits? A Public Company Accounting Oversight Board’s recent Exposure Draft would require auditors of issuers to expand significantly their audit reports beyond current Pass/Fail standards, which could increase audit firms’ disclosures and resultant liabilities. After examining U.S. federal and state statutes plus court decisions regarding auditor liability, we suggest methods to protect the public while allowing audit firms to thrive in these environments.

Can Audit Committee Financial Expertise Increase External Auditors’ Litigation Risk? The Moderating Effect of Audit Committee Independence

ABSTRACTThis study examines whether the perceived independence and financial expertise of audit committee members affect external auditors' exposure to legal liability. We use an experiment in which potential jurors make judgments about auditor independence and legal liability for a case involving an audit failure. We find that perceptions of audit committee independence from management are positively associated with judgments of auditor independence and negatively associated with auditor liability. However, financial expertise of audit committee members can be a double‐edged sword. Our experiment finds that judgments of auditor liability are higher when the audit committee is perceived to have higher financial expertise but lower independence from management. In assessing litigation risk of current and prospective clients, auditors may want to carefully consider the independence of audit committee members from management, particularly when audit committee members have financial expertise. In the event of an audit failure, the financial expertise of nonindependent audit committee members can negatively affect jurors' perceptions of auditor independence and liability.

This article describes the implementation of a case study that uses as its setting the role of KPMG in the Wells Fargo consumer fraud scandal as a way for students to learn about what can happen during an audit failure and what should be done to prevent audit failure. As the case details illustrate, it features the only recent significant Big 4 audit failure that is still being resolved, the audit failure includes many aspects of an auditor’s job, including some that typically are not covered in traditional course textbooks, and it highlights the auditor’s role within the broader context of corporate governance. This case study exposes students to several auditing standards and laws related to 1) consumer fraud; 2) contingent liabilities; 3) materiality; 4) illegal acts; 5) audit evidence; 6) audit opinions; 7) auditor independence and mandatory rotation; 8) auditor liability under the Securities Act of 1933; and 9) auditor liability under the Securities Exchange Act of 1934. The case was used in two undergraduate auditing classes and a graduate auditing class. Student opinion surveys were used to ascertain the learning outcomes of the case study. The survey results suggest strong student engagement and support for learning in groups while collaborating on the case study. The case results also show particularly strong knowledge enhancement with regard to understanding the auditor’s duty to disclose illegal acts, understanding consumer fraud, understanding audit evidence, understanding materiality, and understanding contingent liabilities.

As the 4th Industrial Revolution technologies continue to recast the practices of multiple industries, there is an opportunity for the South African Built Environment to hop on the bandwagon of this technical evolution. Within the country’s-built environment, the focus of the paper was upon reporting on the feasible symbiotic relationship of the construction industry and drone technology.Based on previous literature with regards to drones in the construction industry of South Africa, it was found that many practitioners were eager to investigate the possible use of drones however the main concern was the cost. Therefore, the question of what legal drone and data processing program could feasibly be incorporated by practising professionals into the different construction stages of development was investigated.To produce evidence, results and derive conclusions on the question; an exploratory study of academic journals and articles along with manufacturer specifications was conducted. First off, the paper motivates that through the versatility of drones and the processing programs abilities many current construction practices can become more efficient. It was found though, through interviews with practising professionals, that the only damper on optimising the versatility of drones in South Africa was the legislation.To guide the results of exploration practising professionals were interviewed to provide a baseline on the current use of drones in South Africa. The interviews revealed that before starting to look at a drone, a processing program or the cost thereof the legislation governing drone usage in South Africa must be understood and complied with. Throughout the paper, the legal requirements have been stated to inform the construction industry of these requirements. To follow this, professional drones and data processing programs available and their cost were tabulated to answer the question. However, it was concluded that a drone cannot be limited to a single stage in a construction project because of its multifaceted functionality. Furthermore, it is dependent on the size of the project and the skill of the pilot to whether a drone is a feasible option for each construction project.Future research may need to be done to further refine the study. Practical research tests to see how drones perform on South African construction sites may provide critical results to elaborate on, and provide additional data. Another aspect to be further researched is the legal cost of a drone in terms of time and money to critically answer whether outsourcing or in house drone services are the future of construction company’s practices.

The article deals with legal and ethical aspects of the use of unmanned aerial vehicles (UAVs) in modern conditions. The issues of drone flight regulation, data protection and privacy, problems of military use, as well as liability for the actions of autonomous drones are analyzed. Special attention is paid to insurance, legal liability, and future trends in drone regu-lation. Legislative developments and stricter measures are predicted due to the increasing use of drones in civilian and military applications.

SUMMARY This paper provides the first evidence that state-level liability standards affect auditor behavior. We hypothesize that auditors demand more conservative reporting when their insurance clients are domiciled in states with more stringent standards for third-party claims against the auditor for negligence. To test this hypothesis, we analyze a sample of 3,107 loss reserve observations from 1993 through 2004. Our sample is restricted to private insurers that operate in a single state to control for auditor liability under statutory law and to reduce the possibility of forum shopping by plaintiffs. Consistent with Petroni (1992), we find that financially struggling insurers tend to under-reserve. This behavior is attenuated when the insurer is domiciled in a state that uses either the Restatement of Torts or the reasonable foreseeability standard to determine the auditor's liability to third parties. Compared to the case where the auditor's liability is defined by the legal concept of privity, these standards impose greater legal costs on auditors for ordinary negligence. JEL Classifications: M41; M42; G22; K13.

The article presents a reply by James A. Anderson and Kent E. St. Pierre to a comment on the article "The Potential Impact of Knowledge of Market Efficiency on the Legal Liability of Auditors," regarding market efficiency and legal liability. In their comments on the above mentioned subjects the authors have given importance to some points. The important ones being 1) Speculation: The original paper was concerned with the direction of probable change in court decisions that might be caused by knowledge of market efficiency. 2) Criticism of earlier focus on common law; 3) Damages. Each of these categories are discussed briefly. Under the general heading of Auditors' Legal Liability Under the Common Law, critics have discussed both negligence and deceit. Theft analysis of liability for negligence focuses on the principle of privity of contract and concludes that "the common law courts are a long way from abandoning the notions of privity of contract, primary benefit, and foreseen persons (classes) and will likely continue to hold accountants liable in negligence only to those clearly foreseen third parties whose injuries are directly linked to the accountants' misrepresentation."