How Does High Uncertainty in Accounting Estimates Impact Auditor Litigation Risk? Opposite Effects in Jury Trials and Attorneys’ Out-of-Court Settlements

Abstract

SUMMARY Research suggests that the amount of inherent uncertainty in contemporary accounting estimates has increased in recent years, potentially increasing audit litigation risk. We review a recent study that finds that high estimate uncertainty impacts auditor litigation risk in opposite directions, depending on whether the litigation is decided in a jury trial or settled by attorneys out of court. Mock jurors and attorneys specialized in corporate and securities law read the same case about an alleged undetected material misstatement, with jurors judging auditor negligence and attorneys planning proposed out-of-court settlement negotiations on behalf of auditors. Results show that, under common conditions, mock jurors found auditors less negligent when estimate uncertainty was high. However, attorneys predicted the mock jurors to find auditors more negligent when estimate uncertainty was high, leading them to concede more on behalf of auditors in their proposed settlements.