Audit Partner Disclosure in an Environment of a Second Alleged Audit Failure : Remediating the Smoking Gun in Negligence Cases

Recently, the SEC approved a new rule which requires audit firms to disclose the name of the engagement partners (EPs) responsible for audits, thus allowing stakeholders, for the first time to associate not just audit firms, but also specific audit partners, with past audit failures. Plaintiffs are unlikely to ignore the potential influence of this information in alleged audit failure lawsuits in instances of a partner's second association with audit failure. In light of this, audit firms may find it prudent to undertake substantive actions to avoid a recurrence by the same partner and/or to reduce perceived culpability if a recurrence occurs. Thus, in this study, we investigate how selected audit firms' compensating actions after a first partner failure (allowing subsequently, specific courtroom defensive tactics) impact negligence assessments and damage awards, in those subsequent second civil action lawsuits. We also examine interactions with selected juror attributes (e.g., education, impulsivity and age) that extensive prior research suggests influence negligence judgments. We find that overall one defensive tactic emerges as best, that more educated jurors render more auditor favorable judgments (except in the one best tactic condition), and that juror's impulsivity interacts with the two audit firm's non-optimal remedial actions with preference inversions (i.e., significant ranking differences). Our results are the first to examine in an era of engagement partner disclosure how audit firm responses to past failures incrementally affect future audit firm liability. Our research leverages multiple relevant literatures in attribution theory, impression management, organizational impression management and scientific jury selection, as well as past accounting jury studies