Audit partners' perceptions of the variables associated with the decision to withdraw from audit engagements

Abstract

In recent years auditors have increasingly found themselves the targets of lawsuits claiming legal liability for damages. A few years ago auditors were held liable only to those individuals directly involved with the financial statements. At that time few financial statement users questioned auditors' opinions. However, a court decision (Rusch Factors, Inc. v. Levin, 184 F. Supp. 85, 1968), has made auditors liable to all users of the financial statements. A potential investor, for instance, can file a suit against an auditor even though he may not have reviewed the financial statements prepared by the auditor. He or she need only claim to have been misled by the statements. According to recent court decisions, the auditor can be held liable for either a tort (negligence, gross negligence, and fraud) or a crime in the performance of the attest function. Simple compliance to the profession's standards does not insure that an auditor is safeguarded against lawsuits. For example, in the "Continental Vending Case" (U.S. v. Simon, 425 F 2d 796, 1969) two partners and a manager of a large CPA firm were found guilty of fraud. The courts found that their compliance with professional standards was not enough in this particular instance. Auditors today must look beyond the standards and maintain as their primary concern the "fair" presentation of the entity's financial position, which should not mislead an "average prudent investor." In summary, no clear-cut standards currently exist that auditors may dutifully follow that will shield them from legal liability. Therefore, the auditor must accept some degree of risk when agreeing to accept any engagement. In evaluating current and potential audit engagements, the client's business must represent an expected net favorable change from present conditions, after consideration of these potential risks. After the engagement is accepted, the auditor will learn new information about the client. Possibly some information may make the auditor wish to disengage himself from the client. This study deals with the decision process utilized by management in contemplating whether or not to withdraw from engagements. Little research has been done to date in this area. The research questions surrounding their decisions include the following: (1) investigation of the variables utilized, (2) their appropriate weights, and (3) whether or not these decisions are consistent and rational.