When Do Auditor Defense Tactics Increase Rather Than Decrease Perceived Auditor Negligence?

Abstract

SUMMARY In cases of alleged audit failure, audit firms and/or their defense teams can make statements intended to decrease jurors' assessments of auditor negligence. For example, Cornell et al. (2009) find that expressing sympathy for the victims of undetected fraud successfully decreases mock jurors' assessments of auditor negligence. Extending this research, Grenier et al. (2012) report the results of an experiment indicating that the effectiveness of defense tactics depends on their perceived credibility, and that credibility depends on at least two prevalent situational factors: the importance of the client to the audit firm and the source of the defense tactic (i.e., the national office or the local office that conducted the audit). Specifically, mock jurors perceive auditor defense tactics to be credible (not credible) when client importance is low (high), and when implemented by the firm's national (local) office. Hence, when client importance is low, defense tactics successfully decrease negligence assessments if implemented by the firm's national office, but “backfire” and increase negligence assessments when client importance is high, regardless of the defense tactic's source (national versus local office). Audit firms should therefore use caution when deciding whether to use defense tactics, particularly in negligence suits involving clients that could be perceived as highly important to the audit firm. This article summarizes Grenier et al. (2012) by discussing its motivation, method, results, and practical implications.