When Does Reliance on Technology Elevate Auditor Liability?

Abstract

Audit firms continue to make large investments in audit technologies to enhance effectiveness and efficiency, while simultaneously creating the potential for elevated liability due to well-documented psychological aversions to use of technology in judgment and decision-making. We develop a framework that lays out a process for investigating and understanding the nascent research on how technology use affects auditor liability. As an initial study guided by this framework, we predict that reliance on technology will only result in elevated liability when the audit task is relatively subjective, thereby requiring professional judgment, and the effect will be larger when the undetected misstatement is due to management fraud (vs. error). We predict no effect on auditor liability for objective tasks requiring little to no judgment. Results from two experiments with jury-eligible individuals support these predictions as we only observe elevated liability for subjective audit tasks involving management fraud. In other words, jurors are generally receptive to reliance on technology, but do not view technology as an adequate replacement when auditors need to simultaneously exercise professional judgment and detect cues of management deception. Although more research is necessary, our study should give practitioners a degree of comfort that technology reliance will only elevate auditor liability under specific conditions and not elevate unilaterally due to the use of advanced technology during the audit.