IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

The Case for Limited Auditor Liability - The Effects of Liability Size on Risk Aversion and Ambiguity Aversion

  • Koch, Christopher

    (Sonderforschungsbereich 504)

  • Schunk, Daniel

    ()

    (University of Zürich Institute for Empirical Research in Economics)

Both the US and the EU consider limiting auditor liability in order to ensure the viability of the audit market, but fear its potentially negative impact on audit quality. Our paper discusses the existing empirical results on this topic in the auditing and behavioral economics literature, and provides new evidence based on a controlled laboratory experiment. Our experiment involves real losses and allows for direct inference of behaviour under limited and unlimited liability in situations of ambiguous liability risk. Our findings imply that limited liability can induce an efficient level of audit effort, while unlimited liability induces an inefficiently high level of audit effort. This paper contributes to the literature on auditor liability, as well behavioral economics research in general, by addressing recent controversial issues on behavior in the presence of ambiguity and real losses.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sfb504.uni-mannheim.de/publications/dp07-04.pdf
Download Restriction: no

Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 07-04.

as
in new window

Length: 26 pages
Date of creation: 24 Apr 2007
Date of revision:
Handle: RePEc:xrs:sfbmaa:07-04
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged. The paper has been accepted for presentation at the Southeastern Regional Meeting of the American Accounting Association in May 2007 and at the 5th Accounting Workshop of the Universities of Bern and Fribourg, Switzerland in June 2007. Available at SSRN: http://ssrn.com/abstract=982027
Contact details of provider: Postal:
D-68131 Mannheim

Phone: (49) (0) 621-292-2547
Fax: (49) (0) 621-292-5594
Web page: http://www.sfb504.uni-mannheim.de/
Email:


More information through EDIRC

Web page: http://www.sfb504.uni-mannheim.de

Order Information: Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Einhorn, Hillel J & Hogarth, Robin M, 1986. "Decision Making under Ambiguity," The Journal of Business, University of Chicago Press, vol. 59(4), pages S225-50, October.
  2. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
  3. Kahn, Barbara E & Sarin, Rakesh K, 1988. " Modeling Ambiguity in Decisions under Uncertainty," Journal of Consumer Research, Oxford University Press, vol. 15(2), pages 265-72, September.
  4. Robin M. Hogarth & Hillel J. Einhorn, 1990. "Venture Theory: A Model of Decision Weights," Management Science, INFORMS, vol. 36(7), pages 780-803, July.
  5. Craig R. Fox & Amos Tversky, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 585-603.
  6. Gietzmann, M. B. & Quick, R., 1998. "Capping auditor liability: The German experience," Accounting, Organizations and Society, Elsevier, vol. 23(1), pages 81-103, January.
  7. Rabin, Matthew, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series qt731230f8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Antoni Bosch-Domènech & Joaquim Silvestre, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Working Papers 361, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 1999.
  9. Sarin, Rakesh K & Winkler, Robert L, 1992. "Ambiguity and Decision Modeling: A Preference-Based Approach," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 389-407, October.
  10. Hogarth, Robin M & Kunreuther, Howard, 1989. "Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
  11. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  12. Fox, Craig R. & Weber, Martin, 2002. "Ambiguity Aversion, Comparative Ignorance, and Decision Context," Organizational Behavior and Human Decision Processes, Elsevier, vol. 88(1), pages 476-498, May.
  13. Helga Fehr-Duda & Adrian Bruhin & Thomas Epper & Renate Schubert, 2007. "Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size," SOI - Working Papers 0708, Socioeconomic Institute - University of Zurich, revised Feb 2008.
  14. Curley, Shawn P. & Yates, J. Frank & Abrams, Richard A., 1986. "Psychological sources of ambiguity avoidance," Organizational Behavior and Human Decision Processes, Elsevier, vol. 38(2), pages 230-256, October.
  15. Antoni Bosch-Domènech & Joaquim Silvestre, 2006. "Reflections on gains and losses: A 2 × 2 × 7 experiment," Journal of Risk and Uncertainty, Springer, vol. 33(3), pages 217-235, December.
  16. Ralf Ewert, 1999. "Auditor Liability and the Precision of Auditing Standards," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 181-, March.
  17. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
  18. Kachelmeier, Steven J & Shehata, Mohamed, 1992. "Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People's Republic of China," American Economic Review, American Economic Association, vol. 82(5), pages 1120-41, December.
  19. Hans P. Binswanger, 1980. "Attitudes Toward Risk: Experimental Measurement in Rural India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 395-407.
  20. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  21. Mohammed Abdellaoui & Frank Vossmann & Martin Weber, 2005. "Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty," Management Science, INFORMS, vol. 51(9), pages 1384-1399, September.
  22. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  23. Di Mauro, Carmela & Maffioletti, Anna, 1996. "An Experimental Investigation of the Impact of Ambiguity on the Valuation of Self-Insurance and Self-Protection," Journal of Risk and Uncertainty, Springer, vol. 13(1), pages 53-71, July.
  24. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
  25. Camerer, Colin & Weber, Martin, 1992. "Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
  26. Carmela Di Mauro & Anna Maffioletti, 2004. "Attitudes to risk and attitudes to uncertainty: experimental evidence," Applied Economics, Taylor & Francis Journals, vol. 36(4), pages 357-372.
  27. Mark J Machina, 1982. ""Expected Utility" Analysis without the Independence Axiom," Levine's Working Paper Archive 7650, David K. Levine.
  28. Carmela Di Mauro & Anna Maffioletti, . "The Impact of Ambiguity on the Valuation of Self-Insurance and Self-Protection," Discussion Papers 94/25, Department of Economics, University of York.
  29. Chow, Clare Chua & Sarin, Rakesh K, 2001. "Comparative Ignorance and the Ellsberg Paradox," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 129-39, March.
  30. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  31. Daniel Houser & Michael Keane & Kevin McCabe, 2004. "Behavior in a Dynamic Decision Problem: An Analysis of Experimental Evidence Using a Bayesian Type Classification Algorithm," Econometrica, Econometric Society, vol. 72(3), pages 781-822, 05.
  32. W. Viscusi & Harrell Chesson, 1999. "Hopes and Fears: the Conflicting Effects of Risk Ambiguity," Theory and Decision, Springer, vol. 47(2), pages 157-184, October.
  33. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
  34. Brett Inder & Terry O'Brien, 2003. "The Endowment Effect and the Role of Uncertainty," Bulletin of Economic Research, Wiley Blackwell, vol. 55(3), pages 289-301, 07.
  35. Geiger, Marshall A. & Raghunandan, K. & Rama, Dasaratha V., 2006. "Auditor decision-making in different litigation environments: The Private Securities Litigation Reform Act, audit reports and audit firm size," Journal of Accounting and Public Policy, Elsevier, vol. 25(3), pages 332-353.
  36. Schmidt, Ulrich & Traub, Stefan, 2002. "An Experimental Test of Loss Aversion," Journal of Risk and Uncertainty, Springer, vol. 25(3), pages 233-49, November.
  37. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 1-53.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:xrs:sfbmaa:07-04. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carsten Schmidt)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.