Are Judgments About Auditor Liability Influenced by Audit Committee Expertise and Independence?

Abstract

The Sarbanes-Oxley Act (2002) required that firms disclose whether their audit committee has at least one independent financial expert. This study examines whether the independence and expertise of audit committee members lower the exposure of external auditors to legal liability. We use an experiment where potential jurors make judgments about auditor independence and legal liability for a case that involves an audit failure. We find that audit committee independence is associated with judgments of increased auditor independence and lower legal liability. However, exposure to legal liability is highest when audit committee financial expertise is high but independence from management is low, consistent with the perception that powerful audit committee members can use their influence opportunistically.