Recent research predicts and provides experimental evidence that such frameworks provide clarity to evaluators about the quality of auditors’ judgments. The research found that, when no direct signals of judgment quality are available, only auditors with recognized technical expertise in specific judgment tasks (an indirect signal of judgment quality) are insulated from the increase in litigation exposure arising from less precise standards.
When a direct signal of judgment quality is available (e.g., the auditor used a judgment framework when making specific judgments), there is no longer a relative increase in litigation exposure for auditors with general expertise compared to technical expertise. Nonetheless, when accounting standards are precise, the research found that the use of judgment frameworks may result in dysfunctional outcomes by reducing litigation exposure more for auditors with general expertise, not by improving the perceived quality of their judgments relative to auditors with technical expertise, but by signaling their lack of control over the events leading to the alleged material misstatement.
It is important to note that this research examines the signaling aspects of auditors’ use of a judgment framework, not whether and how professional judgment frameworks actually improve the quality of auditors’ professional judgments. Future research could examine auditors’ willingness and ability to use judgment frameworks and the downstream effects on their professional judgments, which preliminary evidence finds to be positive but to also depend on the economic substance of the transactions.
To learn more, read the April 2011 research article “Signaling the Quality of Auditors’ Professional Judgments: The Joint Effects of Accounting Standard Precision and Auditor Task Expertise” by Jonathan H. Grenier, PhD (Miami University), Bradley Pomeroy, PhD and Matthew Stern (both at University of Illinois at Urbana-Champaign). The paper is also available online at the Social Sciences Research Network.
