An Examination of the Legal Liability Associated with Outsourcing and Offshoring Audit Procedures

    Authors

    A. Lyubimov; V. Arnold;S. G. Sutton

    Comments

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    Abbreviated Journal Title

    Audit.-J. Pract. Theory

    Keywords

    outsourcing; offshoring; audit quality; litigation risk; juror; decision-making; auditor liability; counterfactual reasoning; SUPPLY CHAIN; DAMAGE AWARDS; RISK; JURORS; MODEL; Business, Finance

    Abstract

    Accounting firms have steadily increased the use of outsourcing and offshoring of professional services including independent audit procedures. While firms suggest that the work is of higher quality and similar litigation risk, questions remain as to whether public perceptions may be more negative. This paper examines liability associated with an audit failure when work is performed by another office of the same firm or outsourced to a separate firm, and whether the work is performed domestically or in another country. Results indicate main effects for outsourcing on compensatory damages and an interaction between outsourcing and offshoring on punitive damages. Surprisingly, jurors assess higher than expected litigation awards for a failure by another domestic office of the firm for punitive damages. This result suggests that the close proximity in terms of both geography and organizational distance of the domestic office of the firm leads jurors to find the audit failure less understandable. Post hoc analyses indicate that potential jurors perceive that work completed by another domestic office of the firm has the highest expected quality and lowest risk, while work that is outsourced offshore is expected to be lowest quality and highest risk-consistent with proximity theory.

    Journal Title

    Auditing-a Journal of Practice & Theory

    Volume

    32

    Issue/Number

    2

    Publication Date

    1-1-2013

    Document Type

    Article

    Language

    English

    First Page

    97

    Last Page

    118

    WOS Identifier

    WOS:000317837300005

    ISSN

    0278-0380

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