The Importance of Clarification of Auditors’ Responsibilities Under the New Audit Reporting Standards

Given the uncertainty regarding auditors’ responsibilities, standard setters considered the need for clarification of technical terms such as reasonable assurance in the new audit reporting models. The PCAOB ultimately decided to exclude clarifying language from its final standard while the IAASB made such language mandatory. Given this difference in reporting models, this study investigates the role clarification plays in auditor negligence. We find that absent clarification, jurors perceive auditors as more negligent when the audit report includes a related CAM disclosure than when it does not. However, clarifying what is meant by reasonable assurance mitigates this increase in auditors’ liability exposure by reducing jurors’ perceptions of auditors’ causal control over the misstatement at the time of the audit. Supplemental experiments indicate that the litigation protection associated with clarifying language is a robust finding that persists across the type of audit procedures performed to address the critical area. Thus, our evidence suggests that the PCAOB’s decision to not include such language in the new audit reporting model may have been shortsighted