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August 1993

Expectations of the audit function. (Auditing)

by Pany, Kurt

    Abstract- Jurors' perceptions of the auditing practice largely determine the outcome of most litigation cases. In this light, a survey was conducted in order to determine the attitudes of jurors regarding the profession as compared to the beliefs of auditors. The study discovered that an expectation gap exists between jurors and auditors, supporting views that auditing is still a gray area in the eyes of the public. The greatest variation in perception was seen in the area of auditors' role. Jurors agreed that auditors should serve as public watchdogs and fraud investigators while auditors thought otherwise. Differences were also noted in the issues of audit knowledge and general attitudes toward auditing, although at a lesser degree. The implications of the findings were discussed.

The primary factor in determining the outcome of the litigation against auditors is the mindset of the jurors that sit in judgment of the facts. Do jurors understand the role of the auditor? Do they have knowledge about the audit process. We undertook a study to find out and compare what jurors think with what auditors themselves think.

Research Approach

We used a questionnaire to gather, assess, and compare attitudes toward the auditing profession. The questionnaire solicited juror's and auditors' responses to eight broad questions that were intended to express attitudes toward issues that could be important in litigation.

Jurors. One hundred and forty-one individuals, part of a Municipal County juror pool, participated in the study. The jurors called were from a general jury list to serve in a juror pool, from which individual jurors are selected for specific court cases. The jury list was composed of names drawn from county driver license registration files and from a master file of registered voters.

Auditors. Seventy-eight auditors also participated in the study. The auditors were from a single large international accounting firm. Auditors, who reported an average of 38 months of experience, completed the questionnaire as a part of a two-week audit senior training seminar.

Research Limitations

The most significant limitations of this research relate to the validity of juror attitudes. The juror population was from a pool of potential jurors rather than jurors who had participated in a trial considering auditor malpractice claims. In a trial jurors attitudes are influenced by the presentations made by plaintiff and defendant as well as by the judges charge to the jury. In fact, competing explanations of the auditor's role and duties are often the focus of jury instructions urged by plaintiff and defendant. The research results reflect attitudes before exposure to the influences that would shape attitudes at trial. However, for this reason, the results may have value as indicators of the natural inclinations of jurors that should receive attention in fashioning trial approaches.

Another juror-related limitation is that all jurors are from the same geographical area. Similarly all auditors are from the same firm. The extent to which the attitudes of these groups differ from the attitudes of the general populations of jurors and auditors cannot be determined.

Table 1 presents the results and reveals a large divergence of beliefs and expectations between auditors and jurors.

Audit Knowledge. As expected, auditors strongly agreed with statements suggesting that the financial statements are the responsibility of management and that sampling is necessary. Jurors responded near the midpoint for question one, suggesting that on the average they held the CPA more responsible for the financial statements than did auditors. Jurors responses to question 2 indicate that they felt much less of a need for sampling in audits than did auditors.

The Auditor's Role. Three questions assessed the auditors' role as 1) insurer against large stockholder losses, 2) public watchdog, and 3) an active searcher of fraud. Jurors seemed uncertain as to the auditor's role as an insurer, as reflected by average responses near the midpoint of the scale. Conversely, auditors strongly disagreed with this implied role. Regarding the auditor's role as a public watchdog and as a ferreter of fraud, jurors agreed with these assessments of the auditor's role, whereas the auditors clearly disagreed. The divergence in responses was particularly large when these groups assessed the auditor's role to search for fraud. The reply of 7.59 (on a 10 point scale) suggests that many jurors expected auditors to search for fraud despite its size. Also, the divergence between the expectations of the two groups is greatest here as the average difference in replies was 6.81.

General attitudes toward the profession. Auditors agreed the current standards of audit practice are high, while jurors showed only a very modest agreement. Each group disagreed with question 7's assertion regarding the sharing of losses, with the auditors evidencing stronger disagreement. Concerning the eighth question, jurors as a group did not either strongly agree or disagree that auditors and management work together.

Effects of juror demographics. Given that jurors' demographic profile varied extensively, except for geographical location, additional analysis was conducted to ascertain whether jurors' attitudinal responses were related to certain demographic measures. Results did not reveal any systematic relationships between juror responses and demographic measures. We had reasoned, for example, that individuals with less formal education might be more apt to misunderstand the role and responsibilities of auditors and consequently respond negatively toward the auditing profession. Our results did not support this expectation.


Practitioners, accounting researchers, and study groups (e.g., The Cohen Commission, and the Treadway Commission), have acknowledged the existence of confusion regarding the responsibilities of the auditor for many years. This situation seems to remain.

Of the types of questions we asked, differences in perceptions of the auditor's role received the most diverse responses. Jurors perceived the auditor's role as that of a public watchdog or guardian, to the extent of expecting the auditor to actively search for the smallest fraud. These views suggest that jurors may be inclined to hold the auditor responsible when a company fails or fraud is uncovered after the issuance of a "clean" opinion. Although professional standards require the auditor to take an active role in the detection of fraud, it appears that the jurors might hold the auditor to a higher standard.

Spread the Risk

Auditors have often been perceived to be able to socialize risk: by obtaining malpractice insurance auditors can spread the risk of failing to detect materially misstated financial statements. Auditors are also often perceived to have "deep pockets" relative to a bankrupt or financially distressed firm. However, jurors in our study, on the average, only moderately agreed with the premise that the auditor serves as an insurer. Yet, given juror responses to what the auditing profession believes are unrealistically high performance expectations (e.g., the differences in replies to questions 2 and 5), this moderate level of reply may lose importance. That is, given the high expectations concerning the auditor's role, jurors may find negligence in situations in which auditors almost unanimously would believe none exists. Indeed, one may question whether it would ever be feasible for auditors to analyze every transaction as suggested by jurors' responses to question 2.

Concerning the final question, the auditors in our study, only moderately disagreed with the assertion that corporations and their auditors work hand-in-glove and "only tell the public what they want to tell them." For a group with service to the public and independence as cornerstones of its professional status, the level of the auditor's reply may indicate a systemic problem and certainly reflects a gap between audit practice and public expectations.

Despite the audit profession's response to the expectation gap, it would seem that for the jurors in our TABULAR DATA OMITTED study a large gap remains. These jurors systematically expect more from the auditor than auditors believe they provide. These results have implications for points that auditor-defendants should strive to make in litigation and raise issues that should be pursued by professional groups seeking to narrow the expectation gap.

D. Jordan Lowe, Assistant Professor, Virginia Polytechnic Institute and State University, and Kurt Pany, Arthur Andersen/Don Dupont Professor of Accounting, Arizona State University

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