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Auditor Liability and the Precision of Auditing Standards

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  • Ralf Ewert
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    Abstract

    This paper deals with the precision of auditing standards under a negligence liability system for auditors. Auditing standards such as, e.g., GAAS in the US and GoA in Germany provide rules for judging the auditors' due care and are supposed to serve both descriptive and normative purposes. In order to fulfill these functions, it is usually hypothesized that the standards must be made as precise as possible. This paper argues, however, that vague standards need not be detrimental. In fact, it is shown that for each precise standard there exists a vague standard that outperforms the precise standard equilibrium in terms of auditing efforts, quality of the financial statements, costs of using the legal system, and direct as well as total auditing costs.

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    Bibliographic Info

    Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

    Volume (Year): 155 (1999)
    Issue (Month): 1 (March)
    Pages: 181-

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    Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199903)155:1_181:alatpo_2.0.tx_2-e

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    Postal: Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany
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    Cited by:
    1. Dari-Mattiacci, Giuseppe & Schafer, Hans-Bernd, 2007. "The core of pure economic loss," International Review of Law and Economics, Elsevier, vol. 27(1), pages 8-28, March.
    2. Guiseppe Dari-Mattiacci & Hans-Bernd Schäfer, 2006. "The Core of Pure Economic Loss," Tinbergen Institute Discussion Papers 06-068/1, Tinbergen Institute.
    3. Ralf Ewert & Eberhard Feess & Martin Nell, 2000. "Auditor liability rules under imperfect information and costly litigation: the welfare-increasing effect of liability insurance," European Accounting Review, Taylor and Francis Journals, vol. 9(3), pages 371-385.
    4. Guiseppe Dari-Mattiacci & Hans-Bernd Schäfer, 2006. "The Core of Pure Economic Loss," Tinbergen Institute Discussion Papers 06-068/1, Tinbergen Institute.
    5. Eberhard Feess, 2012. "Malpractice liability, technology choice and negative defensive medicine," The European Journal of Health Economics, Springer, vol. 13(2), pages 157-167, April.
    6. Eberhard Feess & Gerd Muehlheusser & Ansgar Wohlschlegel, 2009. "Environmental liability under uncertain causation," European Journal of Law and Economics, Springer, vol. 28(2), pages 133-148, October.

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