PRACTITIONER SUMMARY When does utilizing valuation specialists reduce auditors' litigation risk?

Abstract

This article summarizes "The effects of specialist type and estimate aggressiveness on juror judgments of auditor negligence" (Brown, Grenier, Pyzoha, and Reffett 2019), which examines two critical factors auditors consider when auditing complex estimates: the type of specialist to engage and the relative aggressiveness of the estimate. In an experiment involving an alleged audit failure, jurors were less likely to find auditors negligent when the auditors consulted with a valuation specialist, but only when managements' estimate was deemed to be more aggressive. The study does not find similar litigation benefits of using a specialist for a less aggressive estimate. A second experiment extended these results by demonstrating jurors were less likely to find auditors negligent when the auditors consulted with an external rather than an internal specialist, because jurors perceived external specialists as having greater independence from the client. Further, the litigation benefits of using an external specialist extended to circumstances when auditors who initially engaged an internal specialist also brought in an external specialist to review the internal specialist's work. The study concludes that utilizing external specialists, to either test management estimates or to review internal specialists' work, can limit auditors' litigation exposure, especially when auditing aggressive management estimates.