The Effects of Critical Audit Matter Removal and Duration on Jurors’ Assessments of Auditor Negligence

A primary concern facing the PCAOB's requirement of disclosing critical audit matters (CAMs) is increased auditor litigation risk. Evidence with Key Audit Matters from the U.K. indicates auditors may subsequently remove a CAM or continue to report the same CAM for several years. Therefore, we investigate the effects of CAM removal and duration on jurors' assessments of auditor negligence when there is a subsequent material misstatement due to fraud in the account related to the CAM. Using the Culpable Control Model, we predict jurors will assess higher auditor negligence when a CAM is removed than when a CAM is reported and when a CAM is reported for multiple years than for one year. Results of our first experiment, in which the CAM relates to a more complex account, highlight a quandary auditors could face in the years subsequent to reporting a CAM such that removal of a CAM that had been reported for multiple years increases auditor liability. Results of our second experiment, in which the CAM relates to a less complex account, provides limited support that CAM removal increases liability. Our results should be of interest to academics, practitioners, and regulators regarding legal implications of the new CAM standard