Evidence of Fraud, Audit Risk and Audit Liability Regimes

Evelyn Patterson () and David Wright
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Evelyn Patterson: State University of New York at Buffalo
David Wright: University of Michigan Business School, University of Michigan

Review of Accounting Studies, 2003, vol. 8, issue 1, No 5, 105-131

Abstract: Abstract We investigate the effectiveness of proportionate liability in reducing the probability of fraud and audit risk relative to joint and several liability in two strategic audit settings: one that provides conclusive evidence of fraud and one that provides inconclusive evidence of fraud. In both settings the auditor makes an audit effort choice, but in the second setting the auditor also evaluates the audit evidence. Our results show that when the auditor chooses only effort, a proportionate liability rule with large marginal liability relief decreases audit risk. However, when the auditor also evaluates the audit evidence this result no longer holds.

Keywords: legal liability regimes; strategic auditing; proportionate liability; fraud (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1023/A:1022652023592

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