THE IMPACT OF INCONSISTENT EVIDENCE DOCUMENTATION ON THIRD-PARTY PERCEPTIONS OF AUDIT QUALITY AND JUDGMENTS OF AUDITOR LIABILITY: AN EXAMINATION OF THE EFFECTIVENESS OF AS3 DOCUMENTATION EXPECTATIONS IN AUDIT LITIGATION
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The regulations stemming from the Sarbanes-Oxley Act of 2002 and the creation of the Public Companies Accounting Oversight Board (PCAOB) in response to recent corporate frauds have increased scrutiny on auditors' judgments and decisions. Accounting researchers have investigated the effects of new techniques and professional guidance on auditors' assessments, with implications for audit quality and litigation. Audit litigation research expands upon these implications and tests them by eliciting the perceptions of third parties, such as jurors. In accordance with the new PCAOB standards and their intended positive effects on audit quality, this study represents an investigation into the effectiveness of inconsistent evidence documentation, required by Auditing Standard No. 3 (AS3), and the pursuit of such evidence in impacting perceptions of audit quality and judgments of auditor liability in the event of an audit failure. A review of literature on third-party decision making and expectations deviations is presented along with research models for assessments of responsibility and damages. In addition, political ideology, a relevant individual difference in responsibility assessments, is addressed. Given the relevance of the perspectives of individuals with legal education and experience in litigation matters, the research issues are specifically considered through the lens of law students. A between-subjects experiment, varying the documentation and evidence provided by the auditor and the documentation expectations set forth by auditing standards, captured the law students' judgments of responsibility and damages, along with their perceptions of audit quality for an audit failure scenario. Per the results, inconsistent evidence documentation was significantly associated with increased perceptions of audit quality, beyond the impact of the corresponding evidential pursuit, a pattern primarily observed in the presence of the AS3 standard. Furthermore, the additional expectations of AS3 resulted in reduced audit quality perceptions. In turn, perceptions of audit quality had a significant negative relationship with assessed levels of auditor responsibility. However, the documentation and expectations did not have a direct impact on responsibility judgments beyond the effects of audit quality, nor did political ideology. The pursuit of inconsistent evidence served as the primary mitigating factor in damage assessments. The implications and limitations of the research are discussed.