Accounting Guidance Flexibility, Auditors’ Ethical Characteristics, and Blame

We investigate the social and legal blame that investors assign to auditors following unfavorable outcomes using the precision of accounting guidance described as principles-based (i.e., less-precise) or rules-based (i.e., more precise), and why investors assign blame at differing levels. We also examine how the precision of accounting guidance is related to perceptions of auditors’ ethical characteristics. We posit that blame assigned to auditors differs based on auditors’ perceived decision-making control. Results indicate a significant association between the precision of accounting guidance and social blame, and a positive association between social blame and legal blame under standards described as less-precise. Investors are also more likely to make negative evaluations of the auditor’s ethical characteristics under less-precise accounting following an unfavorable outcome, which helps explain the association between social and legal blame. Our findings suggest that auditors could face additional blame as a result of a trend toward less-precise accounting guidance, with investors being more likely to question the auditors’ ethical characteristics following unfavorable outcomes.