Title

An Examination Of The Legal Liability Associated With Outsourcing And Offshoring Audit Procedures

Keywords

Audit quality; Auditor liability; Counterfactual reasoning; Juror decision-making; Litigation risk; Offshoring; Outsourcing

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.

Publication Date

4-26-2013

Publication Title

Auditing

Volume

32

Issue

2

Number of Pages

97-118

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.2308/ajpt-50354

Socpus ID

84876478171 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/84876478171

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